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

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**FORM 10-Q**

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

**For the quarterly period ended June28, 2007**

**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**

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

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

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

 

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

Class A Common Stock—129,462,357 sharesoutstanding at August 3, 2007

Class B Common Stock—23,708,639 sharesoutstanding at August 3, 2007

 

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

 

2

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**PARTI—FINANCIAL INFORMATION**

**Item 1.    FINANCIALSTATEMENTS**

**REGAL ENTERTAINMENT GROUP**

**UNAUDITED CONDENSED CONSOLIDATEDBALANCE SHEETS**

**(in millions, except share data)**
| ** **                                                                                                                                                                                         | ** ** | **June 28, 2007** | ** ** | **December 28, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                         |       |                        |       |                            |       |
| CURRENT ASSETS:                                                                                                                                                                                    |       |                        |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                          |       | $                           | 406.9      |                            | $          | 162.2 |   |
| Trade and other  receivables, net                                                                                                                                                                  |       | 22.8                        |       | 59.8                            |       |
| Inventories                                                                                                                                                                                        |       | 9.9                         |       | 8.0                             |       |
| Prepaid expenses and  other current assets                                                                                                                                                         |       | 10.6                        |       | 1.8                             |       |
| Assets held for sale                                                                                                                                                                               |       | 6.7                         |       | 8.6                             |       |
| Deferred income tax  asset                                                                                                                                                                         |       | 0.8                         |       | 0.6                             |       |
| TOTAL CURRENT ASSETS                                                                                                                                                                               |       | 457.7                       |       | 241.0                           |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                                            |       |                        |       |                            |       |
| Land                                                                                                                                                                                               |       | 132.0                       |       | 133.2                           |       |
| Buildings and leasehold  improvements                                                                                                                                                              |       | 1,691.0                     |       | 1,667.3                         |       |
| Equipment                                                                                                                                                                                          |       | 866.9                       |       | 852.6                           |       |
| Construction in  progress                                                                                                                                                                          |       | 30.1                        |       | 31.7                            |       |
| Total property and  equipment                                                                                                                                                                      |       | 2,720.0                     |       | 2,684.8                         |       |
| Accumulated  depreciation and amortization                                                                                                                                                         |       | (843.8                      | )          | (763.0                          | )          |
| TOTAL PROPERTY AND  EQUIPMENT, NET                                                                                                                                                                 |       | 1,876.2                     |       | 1,921.8                         |       |
| GOODWILL                                                                                                                                                                                           |       | 186.0                       |       | 214.9                           |       |
| DEFERRED INCOME TAX  ASSET                                                                                                                                                                         |       | 88.7                        |       | 21.4                            |       |
| OTHER NON-CURRENT  ASSETS                                                                                                                                                                          |       | 68.8                        |       | 69.7                            |       |
| TOTAL ASSETS                                                                                                                                                                                       |       | $                           | 2,677.4    |                            | $          | 2,468.8 |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                    |       |                        |       |                            |       |
| CURRENT LIABILITIES:                                                                                                                                                                               |       |                        |       |                            |       |
| Current portion of debt  obligations                                                                                                                                                               |       | $                           | 146.2      |                            | $          | 146.2 |   |
| Accounts payable                                                                                                                                                                                   |       | 135.5                       |       | 168.1                           |       |
| Accrued expenses                                                                                                                                                                                   |       | 57.5                        |       | 61.1                            |       |
| Income taxes payable                                                                                                                                                                               |       | 66.2                        |       | 52.3                            |       |
| Deferred revenue                                                                                                                                                                                   |       | 112.1                       |       | 99.4                            |       |
| Interest payable                                                                                                                                                                                   |       | 28.8                        |       | 29.2                            |       |
| TOTAL CURRENT  LIABILITIES                                                                                                                                                                         |       | 546.3                       |       | 556.3                           |       |
| LONG-TERM DEBT                                                                                                                                                                                     |       | 1,726.7                     |       | 1,735.3                         |       |
| LEASE FINANCING  ARRANGEMENTS                                                                                                                                                                      |       | 83.9                        |       | 85.8                            |       |
| CAPITAL LEASE  OBLIGATIONS                                                                                                                                                                         |       | 19.5                        |       | 20.6                            |       |
| NON-CURRENT DEFERRED  REVENUE                                                                                                                                                                      |       | 281.7                       |       | —                          |       |
| OTHER NON-CURRENT  LIABILITIES                                                                                                                                                                     |       | 115.2                       |       | 91.1                            |       |
| TOTAL LIABILITIES                                                                                                                                                                                  |       | 2,773.3                     |       | 2,489.1                         |       |
| MINORITY INTEREST                                                                                                                                                                                  |       | 1.9                         |       | 1.9                             |       |
| STOCKHOLDERS’ DEFICIT:                                                                                                                                                                        |       |                        |       |                            |       |
| Class A common  stock, $0.001 par value; 500,000,000 shares authorized, 129,429,191 and  126,448,479 shares issued and outstanding at June 28, 2007 and  December 28, 2006, respectively |       | 0.1                         |       | 0.1                             |       |
| Class B common  stock, $0.001 par value; 200,000,000 shares authorized, 23,708,639 and  23,908,639 shares issued and outstanding at June 28, 2007 and  December 28, 2006, respectively   |       | —                      |       | —                          |       |
| Preferred stock, $0.001  par value; 50,000,000 shares authorized; none issued and outstanding                                                                                                      |       | —                      |       | —                          |       |
| Additional paid in  capital (deficit)                                                                                                                                                              |       | (164.0                      | )          | (66.1                           | )          |
| Retained earnings                                                                                                                                                                                  |       | 53.3                        |       | 30.2                            |       |
| Accumulated other  comprehensive income, net                                                                                                                                                       |       | 12.8                        |       | 13.6                            |       |
| TOTAL STOCKHOLDERS’  DEFICIT                                                                                                                                                                  |       | (97.8                       | )          | (22.2                           | )          |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                   |       | $                           | 2,677.4    |                            | $          | 2,468.8 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

3

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**REGAL ENTERTAINMENT GROUP**

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME**

**(in millions, except share andper share data)**
| ** **                                                                                                                                                                                                                                                    | ** ** | **Quarter Ended  June 28, 2007** | ** ** | **Quarter Ended  June 29, 2006** | ** ** | **Two Quarters  Ended  June 28, 2007** | ** ** | **Two Quarters  Ended  June 29, 2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| REVENUES:                                                                                                                                                                                                                                                     |       |                                            |       |                                            |       |                                                  |       |                                                  |       |
| Admissions                                                                                                                                                                                                                                                    |       | $                                               | 457.9      |                                            | $          | 452.5                                                 |       | $                                                     | 884.6      |   | $ | 844.5 |   |
| Concessions                                                                                                                                                                                                                                                   |       | 197.4                                           |       | 185.2                                           |       | 365.7                                                 |       | 343.8                                                 |       |
| Other operating revenue                                                                                                                                                                                                                                       |       | 28.1                                            |       | 46.9                                            |       | 58.1                                                  |       | 81.4                                                  |       |
| TOTAL REVENUE                                                                                                                                                                                                                                                 |       | 683.4                                           |       | 684.6                                           |       | 1,308.4                                               |       | 1,269.7                                               |       |
| OPERATING  EXPENSES:                                                                                                                                                                                                                                          |       |                                            |       |                                            |       |                                                  |       |                                                  |       |
| Film rental and advertising costs                                                                                                                                                                                                                             |       | 252.4                                           |       | 244.6                                           |       | 470.4                                                 |       | 441.6                                                 |       |
| Cost of concessions                                                                                                                                                                                                                                           |       | 27.9                                            |       | 28.8                                            |       | 52.9                                                  |       | 52.9                                                  |       |
| Rent expense                                                                                                                                                                                                                                                  |       | 83.3                                            |       | 79.8                                            |       | 164.3                                                 |       | 157.4                                                 |       |
| Other operating expenses                                                                                                                                                                                                                                      |       | 176.2                                           |       | 168.6                                           |       | 341.1                                                 |       | 327.2                                                 |       |
| General and administrative expenses (including  share-based compensation of $1.4 and $2.1 for the quarters ended June 28,  2007 and June 29, 2006, respectively, and $3.5 and $4.1 for the two quarters  ended June 28, 2007 and June 29, 2006, respectively) |       | 16.8                                            |       | 17.1                                            |       | 32.8                                                  |       | 33.0                                                  |       |
| Depreciation and amortization                                                                                                                                                                                                                                 |       | 46.1                                            |       | 50.7                                            |       | 92.4                                                  |       | 100.4                                                 |       |
| Net (gain) loss on disposal and impairment of  operating assets                                                                                                                                                                                               |       | (2.6                                            | )          | 5.1                                             |       | 2.8                                                   |       | 10.8                                                  |       |
| Equity in earnings of joint venture including former  employee compensation                                                                                                                                                                                   |       | 0.3                                             |       | 0.9                                             |       | 3.7                                                   |       | 6.7                                                   |       |
| TOTAL OPERATING  EXPENSES                                                                                                                                                                                                                                     |       | 600.4                                           |       | 595.6                                           |       | 1,160.4                                               |       | 1,130.0                                               |       |
| INCOME FROM  OPERATIONS                                                                                                                                                                                                                                       |       | 83.0                                            |       | 89.0                                            |       | 148.0                                                 |       | 139.7                                                 |       |
| OTHER EXPENSE  (INCOME):                                                                                                                                                                                                                                      |       |                                            |       |                                            |       |                                                  |       |                                                  |       |
| Interest expense, net                                                                                                                                                                                                                                         |       | 25.5                                            |       | 29.4                                            |       | 56.5                                                  |       | 60.5                                                  |       |
| Gain on NCM transaction (Note 3)                                                                                                                                                                                                                              |       | —                                          |       | —                                          |       | (350.7                                                | )          | —                                                |       |
| Gain on sale of Fandango interest                                                                                                                                                                                                                             |       | (28.3                                           | )          | —                                          |       | (28.3                                                 | )          | —                                                |       |
| Earnings recognized from NCM                                                                                                                                                                                                                                  |       | (2.2                                            | )          | —                                          |       | (2.2                                                  | )          | —                                                |       |
| Minority interest in earnings of consolidated  subsidiaries and other                                                                                                                                                                                         |       | 0.2                                             |       | 0.1                                             |       | 0.2                                                   |       | 0.1                                                   |       |
| Loss on extinguishment of debt                                                                                                                                                                                                                                |       | —                                          |       | 31.6                                            |       | —                                                |       | 32.5                                                  |       |
| TOTAL OTHER  EXPENSE (INCOME), NET                                                                                                                                                                                                                            |       | (4.8                                            | )          | 61.1                                            |       | (324.5                                                | )          | 93.1                                                  |       |
| INCOME BEFORE  INCOME TAXES                                                                                                                                                                                                                                   |       | 87.8                                            |       | 27.9                                            |       | 472.5                                                 |       | 46.6                                                  |       |
| PROVISION FOR  INCOME TAXES                                                                                                                                                                                                                                   |       | 35.1                                            |       | 11.3                                            |       | 190.7                                                 |       | 18.8                                                  |       |
| NET INCOME                                                                                                                                                                                                                                                    |       | $                                               | 52.7       |                                            | $          | 16.6                                                  |       | $                                                     | 281.8      |   | $ | 27.8 |   |
| EARNINGS PER  SHARE:                                                                                                                                                                                                                                          |       |                                            |       |                                            |       |                                                  |       |                                                  |       |
| Basic                                                                                                                                                                                                                                                         |       | $                                               | 0.35       |                                            | $          | 0.11                                                  |       | $                                                     | 1.87       |   | $ | 0.19 |   |
| Diluted                                                                                                                                                                                                                                                       |       | $                                               | 0.33       |                                            | $          | 0.11                                                  |       | $                                                     | 1.78       |   | $ | 0.18 |   |
| AVERAGE SHARES  OUTSTANDING (in thousands)                                                                                                                                                                                                                    |       |                                            |       |                                            |       |                                                  |       |                                                  |       |
| Basic                                                                                                                                                                                                                                                         |       | 151,791                                         |       | 149,016                                         |       | 151,043                                               |       | 148,394                                               |       |
| Diluted                                                                                                                                                                                                                                                       |       | 160,156                                         |       | 156,463                                         |       | 158,679                                               |       | 155,253                                               |       |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

4

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**REGAL ENTERTAINMENT GROUP**

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in millions)**
| ** **                                                                       | ** ** | **Two Quarters  Ended  June 28, 2007** | ** ** | **Two Quarters  Ended  June 29, 2006** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                           |       |                                                  |       |                                                  |       |
| Net income                                                                       |       | $                                                     | 281.8      |                                                  | $          | 27.8 |   |
| Adjustments to reconcile net income to cash provided  by operating activities:   |       |                                                  |       |                                                  |       |
| Depreciation and amortization                                                    |       | 92.4                                                  |       | 100.4                                                 |       |
| Share-based compensation expense                                                 |       | 3.5                                                   |       | 4.1                                                   |       |
| Minority interest in earnings of consolidated  subsidiaries                      |       | —                                                |       | 0.1                                                   |       |
| Deferred income tax benefit                                                      |       | (46.8                                                 | )          | (4.8                                                  | )          |
| Net loss on disposal and impairment of operating  assets                         |       | 2.8                                                   |       | 10.8                                                  |       |
| Equity in earnings of joint venture including former  employee compensation      |       | 3.7                                                   |       | 6.7                                                   |       |
| Gain on sale of Fandango interest                                                |       | (28.3                                                 | )          | —                                                |       |
| Non-cash gain on NCM transaction                                                 |       | (3.4                                                  | )          | —                                                |       |
| Loss on extinguishment of debt                                                   |       | —                                                |       | 32.5                                                  |       |
| Non-cash rent expense                                                            |       | 4.7                                                   |       | 5.4                                                   |       |
| Changes in operating assets and liabilities (excluding  effects of acquisition): |       |                                                  |       |                                                  |       |
| Trade and other receivables                                                      |       | 36.9                                                  |       | 22.3                                                  |       |
| Inventories                                                                      |       | (1.8                                                  | )          | (1.1                                                  | )          |
| Prepaid expenses and other current assets                                        |       | (3.9                                                  | )          | (1.5                                                  | )          |
| Accounts payable                                                                 |       | (32.5                                                 | )          | (25.8                                                 | )          |
| Income taxes payable                                                             |       | 41.5                                                  |       | (32.8                                                 | )          |
| Deferred revenue                                                                 |       | 294.3                                                 |       | 1.7                                                   |       |
| Accrued expenses and other liabilities                                           |       | (1.6                                                  | )          | (10.0                                                 | )          |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                       |       | 643.3                                                 |       | 135.8                                                 |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                           |       |                                                  |       |                                                  |       |
| Capital expenditures                                                             |       | (57.8                                                 | )          | (55.4                                                 | )          |
| Proceeds from disposition of assets                                              |       | 10.8                                                  |       | 5.0                                                   |       |
| Proceeds from sale of Fandango interest                                          |       | 28.3                                                  |       | —                                                |       |
| Investment in DCIP                                                               |       | (1.5                                                  | )          | —                                                |       |
| NET CASH USED IN  INVESTING ACTIVITIES                                           |       | (20.2                                                 | )          | (50.4                                                 | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                           |       |                                                  |       |                                                  |       |
| Cash used to pay dividends                                                       |       | (393.2                                                | )          | (89.5                                                 | )          |
| Proceeds from stock option exercises                                             |       | 14.8                                                  |       | 11.9                                                  |       |
| Net payments on long term obligations                                            |       | (11.6                                                 | )          | (10.0                                                 | )          |
| Cash used to settle conversions of convertible notes                             |       | (0.1                                                  | )          | (135.7                                                | )          |
| Net proceeds attributable to convertible note hedge  and warrant                 |       | —                                                |       | 16.1                                                  |       |
| Excess tax benefits from share-based payment  arrangements                       |       | 14.3                                                  |       | 9.9                                                   |       |
| Payment of debt acquisition costs and other                                      |       | (2.6                                                  | )          | (3.2                                                  | )          |
| Proceeds from Regal Cinemas senior credit facility                               |       | —                                                |       | 100.0                                                 |       |
| NET CASH USED IN  FINANCING ACTIVITIES                                           |       | (378.4                                                | )          | (100.5                                                | )          |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                            |       | 244.7                                                 |       | (15.1                                                 | )          |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                |       | 162.2                                                 |       | 196.3                                                 |       |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                      |       | $                                                     | 406.9      |                                                  | $          | 181.2 |   |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                                             |       |                                                  |       |                                                  |       |
| Cash paid for income taxes, net of refunds received                              |       | $                                                     | 176.8      |                                                  | $          | 49.0 |   |
| Cash paid for  interest                                                          |       | $                                                     | 64.6       |                                                  | $          | 61.9 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

5

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**REGAL ENTERTAINMENT GROUP**

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

Regal Entertainment Group (the “Company,” “Regal,” “we”or “us”) is the parent company of Regal Entertainment Holdings, Inc. (“REH”),which is the parent company of Regal Cinemas Corporation (“Regal Cinemas”) andits subsidiaries. Regal Cinemas’ subsidiaries include Regal Cinemas, Inc.(“RCI”) and its subsidiaries, which include Edwards Theatres, Inc. (“Edwards”),Regal CineMedia Corporation (“Regal CineMedia” or “RCM”), Hoyts CinemasCorporation (“Hoyts”) and United Artists Theatre Company (“United Artists”).The terms Regal or the Company, REH, Regal Cinemas, RCI, Edwards, RegalCineMedia or RCM, Hoyts and United Artists shall be deemed to include therespective subsidiaries of such entities when used in discussions includedherein regarding the current operations or assets of such entities.

Regal operates the largest theatre circuit in theUnited States, consisting of 6,368 screens in 529 theatres in 39 states and theDistrict of Columbia as of June 28, 2007.  The Company formally operateson a 52-week fiscal year with each quarter generally consisting of 13 weeks,unless otherwise noted. The Company’s fiscal year ends on the first Thursdayafter December 25, which in certain years results in a 53-week fiscalyear.  As of June 28, 2007, the Company managed its business under onereportable segment: theatre exhibition operations.

For a discussion of the series of events leading to theformation of the Company and other significant transactions which have occurredthrough December 28, 2006, please refer to Note 1 to the consolidatedfinancial statements included in Part II, Item 8 of our annual report onForm 10-K filed on February 26, 2007 with the Securities and ExchangeCommission (the “Commission”) (File No. 001-31315) for the fiscal yearended December 28, 2006.

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

During the quarterended June 28, 2007, the Company sold its equity interest in Fandango, Inc. forproceeds of $28.3 million.  As a resultof this transaction, the Company recognized a gain on the sale of approximately$28.3 million ($17.0 million after tax). In connection with the sale, the Company agreed to amend its existingcontract with Fandango, Inc. in exchange for an amendment fee totaling $5.5million.  This amount has been recordedas deferred revenue and will be amortized to revenue on a straight-line basisover the six year term of the amendment.

During the two quartersended June 28, 2007, Regal paid two quarterly cash dividends of $0.30 on eachoutstanding share of the Company’s Class A and Class B common stock,including outstanding restricted stock (see Note 6—“Capital Stock andShare-Based Compensation”), or approximately $91.2 million in theaggregate.  In addition, on March 5,2007, Regal declared an extraordinary cash dividend of $2.00 per share on eachoutstanding share of its Class A and Class B common stock, includingoutstanding restricted stock. Stockholders of record at the close of businesson March 28, 2007 were paid this dividend on April 13, 2007. The dividend wasrecorded as a $302.0 million increase to stockholders’ deficit upondeclaration.

6

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Total comprehensive income for the quarters ended June28, 2007 and June 29, 2006 was $55.0 million and $21.3 million,respectively.  Total comprehensive income for the two quarters ended  June 28, 2007 and June 29, 2006 was $281.0million and $39.5 million, respectively. Total comprehensive income consists of net income and othercomprehensive income (loss), net of tax, related to the change in the aggregateunrealized gain (loss) on the Company’s interest rate swap arrangements duringeach of the quarters and two quarters ended June 28, 2007 and June 29, 2006.The Company’s interest rate swap arrangements are further described inNote 4—“Debt Obligations.”

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

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

**2. RECENT ACQUISITIONS**

***Acquisition of fourAMC Entertainment Inc. Theatres***

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

The following is a summary of the preliminaryallocation of the aggregate cash purchase price to the estimated fair values ofthe assets acquired and liabilities assumed at the respective dates ofacquisition (in millions):

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

 

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

***Formation ofNational CineMedia, LLC***

On March 29, 2005, Regal and AMC announced thecombination of the operations of RCM and AMC’s subsidiary, NCN, into a newjoint venture company known as National CineMedia. On July 15, 2005,Cinemark, through a wholly owned subsidiary, acquired a 20.7% interest inNational CineMedia.  National CineMedia focuses on the expansion ofin-theatre advertising and the creation of complementary business lines thatleverage the existing operating personnel, asset and customer bases of itstheatrical exhibition partners, which includes us, AMC and Cinemark. NationalCineMedia is, subject to limited exceptions, the exclusive provider ofadvertising and event services to Regal, AMC and Cinemark.

As part of the joint venture transaction, onMarch 29, 2005, RCM and NCN entered into a Contribution and Unit HoldersAgreement with National CineMedia pursuant to which, among other things, RCMand NCN agreed to contribute assets to National CineMedia and National CineMediaagreed to assume specified liabilities of RCM and NCN in consideration for theissuance of equity units by National CineMedia to RCH and NCN, respectively.The assets contributed to National CineMedia by RCM included fixed assets andagreements as well as approximately $1.3 million in cash. The Companyaccounts for its investment in National CineMedia using the equity method ofaccounting and did not recognize any gain or loss resulting from the initialformation of National CineMedia due to the Company’s continued involvement inthe operations of National CineMedia.

Pursuant to the other documents entered into inconnection with the joint venture transaction, AMC and Regal, through theirsubsidiaries, retained all advertising contracts signed on or before the closeof business on March 31, 2005, and Cinemark retained all advertisingcontracts signed on or before the close of business on July 15, 2005,subject to an administrative fee (32% during fiscal 2006 through the date ofthe IPO of NCM Inc.) payable to National CineMedia to service such contracts.For the period from December 29, 2006 through February 12, 2007 and the quarterended June 29, 2006, administrative fees paid to National CineMedia withrespect to these contracts totaled less than $0.1 million (on less than$0.1 million of revenue) and $1.9 million (on $6.0 million of revenue),respectively.  Revenues and expenses attributable to these advertisingcontracts were recorded as a component of other operating revenues and otheroperating expenses in the Company’s financial statements. For contracts signedby National CineMedia after the close of business on March 31, 2005 throughFebruary 12, 2007, AMC and Regal, and with respect to advertising contractssigned after the close of business on July 15, 2005, Cinemark, throughtheir respective subsidiaries, received revenue from National CineMedia withrespect to advertising and event services at their respective theatres throughan agreed upon formula as well as equity in income/loss of National CineMedia.Such formula was based on the weighted average number of screens owned by andthe number of theatre patrons of the applicable exhibitor’s theatres for anymeasurement period.  During the period from December 29, 2006 throughFebruary 12, 2007, the Company recorded $6.2 million of advertisingrevenues and $0.4 million****ofother revenues derived from these contracts, which are presented as a componentof other operating revenues in the Company’s financial statements. During thequarter ended June 29, 2006, the Company recorded $14.9 million ofadvertising revenues and $0.7 million of other revenues derived from thesecontracts. For the period from December 29, 2006 through February 12, 2007 andthe quarter ended June 29, 2006, the Company recorded a loss of$2.0 million and $0.2 million, respectively, representing its share of thenet loss of National CineMedia. As of December 28, 2006, RCH owned 45.4%of the Class A Units of National CineMedia, AMC, as successor in interestto NCN, owned 26.3% of the Class A Units of National CineMedia andCinemark owned 28.3% of the Class A Units of National CineMedia.  See“Initial Public Offering of National CineMedia, Inc. and Other Developments”below for a discussion of related amounts for the period from February 13, 2007through June 28, 2007.

As described in Note 4 to the consolidated financialstatements included in our annual report on Form 10-K for the fiscal yearended December 28, 2006, in connection with the formation of NationalCineMedia, on May 11, 2005, RCI adopted and approved the RCI SeverancePlan For Equity Compensation (the “Severance Plan”). Participation in theSeverance Plan is limited to employees of RCM who held an unvested option topurchase shares of Regal’s Class A common stock or unvested shares of 

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Regal’srestricted Class A common stock pursuant to the terms of the Company’s2002 Incentive Plan (the “Incentive Plan”) immediately prior to such employee’stermination of employment with RCM and commencement of employment with NationalCineMedia. Each employee’s termination of employment with RCM was effective asof the close of business on May 24, 2005 and commencement of employmentwith National CineMedia was effective as of May 25, 2005. Under the termsof and subject to the conditions of the Severance Plan, each eligible employeewho participates in the Severance Plan is, at the times set forth in theSeverance Plan, entitled to cash payments based on the value of Regal’sClass A common stock on May 24, 2005 as calculated pursuant to the termsof the Severance Plan.  As the Severance Plan provides for payments overfuture periods that are contingent upon continued employment with NationalCineMedia, the cost of the Severance Plan will be recorded as an expense overthe remaining required service periods. During the quarters ended June 28, 2007and June 29, 2006, the Company recorded total severance expense ofapproximately $0.3 million and $0.8 million, respectively, includingpayments in lieu of dividends, related to the Severance Plan.  In addition, during the two quarters endedJune 28, 2007 and June 29, 2006, the Company recorded total severance expenseof approximately $1.7 million and $2.4 million, respectively.

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

On February 13, 2007, NCM Inc., a newly formedentity that serves as the sole manager of National CineMedia, completed an IPOof its common stock. NCM Inc. sold 38.0 million shares of its common stock for$21 per share in the IPO, less underwriting discounts and expenses.  NCM Inc. used a portion of the net proceedsfrom the IPO to acquire newly issued common units from NationalCineMedia.  As a result of the NCM Inc.’s acquisition of common unitsin National CineMedia, the Company recognized a change in interest gain ofapproximately $182.7 million along with a corresponding increase in the Company’sequity investment in National CineMedia.

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

The amount we received for agreeing to the ESAmodification was approximately $281.0 million, which represents the estimatedfair value of the ESA modification payment.  We estimated the fair valueof the ESA payment based upon a valuation performed by the Company with theassistance of third party specialists.  This amount has been recorded asdeferred revenue and will be amortized to advertising revenue over the30 year term of the agreement following the units of revenuemethod.   Under the units of revenue method, amortization for aperiod is calculated by computing a ratio of the proceeds received from the ESAmodification payment to the total expected decrease in revenues due to entryinto the new ESA over the 30 year term of the agreement and then applying thatratio to the current period’s expected decrease in revenues due to entry intothe new ESA. During the quarter ended June 28, 2007 and the period fromFebruary 13, 2007 through June 28, 2007, the Company recognized $0.6 millionand $0.9 million, respectively of advertising revenue utilizing the units ofrevenue amortization method.

At the closing of the IPO, the underwriters exercisedtheir over-allotment option to purchase an additional 4.0 million shares ofcommon stock of NCM Inc. at the initial offering price of $21 per share, lessunderwriting discounts and commissions. In connection with this over-allotmentoption exercise,

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Regal,AMC and Cinemark each sold to NCM Inc. common units of National CineMedia on apro rata basis at the initial offering price of $21 per share, lessunderwriting discounts and expenses. Regal sold approximately 1.6 millioncommon units to NCM Inc. for proceeds of approximately $32.2 million andrecognized a gain on the sale of such units of approximately $19.3million.  Upon completion of this sale of common units and as of June 28,2007, Regal held approximately 21.2 million common units of National CineMedia,or a 22.6% interest.

Upon the closing of the IPO, National CineMediaentered into a $725 million term loan facility, the net proceeds of which wereused to redeem preferred units issued to each of Regal, AMC and Cinemark on a prorata basis pursuant to a recapitalization of National CineMedia prior tocompletion of the IPO. We received approximately $315.1 million as a result ofthe preferred unit redemption. Upon redemption by National CineMedia of thepreferred units, the Company applied such cash distributions from NationalCineMedia by (1) reducing its equity investment in National CineMedia fromapproximately $166.4 million to zero and (2) recording distributions in excessof the investment balance in National CineMedia of approximately $148.7 millionas a gain.  Because the investment (and net advances) in NationalCineMedia has been reduced to zero, we will not provide for any additionallosses as we have not guaranteed obligations of National CineMedia and we arenot otherwise committed to provide further financial support for NationalCineMedia.  In addition, during future periods, the Company will notrecognize its share of any undistributed equity in the earnings of NationalCineMedia until National CineMedia’s future net earnings equal or exceed theamount of the above excess distribution.  Until such time, equity earningswill be recognized only to the extent that the Company receives cashdistributions from National CineMedia. During the quarter ended June 28, 2007,the Company received $2.2 million in cash distributions from NationalCineMedia. As a result, $2.2 million in****equityearnings were recognized during the quarter ended June 28, 2007.

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

We account for our investment in National CineMediafollowing the equity method of accounting.  The changes in the carryingamount of our investment in National CineMedia for the two quarters ended June28, 2007 are as follows (in millions): 
| ** **                                                                          | ** ** | **Investment in  National CineMedia, LLC** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Balance as of  December 28, 2006                                                    |       | $                                                         | (1.5       | ) |
| Equity in loss  of National CineMedia (December 29, 2006 through February 12, 2007) |       | (2.0                                                      | )          |
| Gain on change  in interest                                                         |       | 182.7                                                     |       |
| Net book value  of units sold in over-allotment                                     |       | (12.8                                                     | )          |
| Redemption of  preferred units                                                      |       | (166.4                                                    | )          |
| Earnings  recognized from National CineMedia                                        |       | 2.2                                                       |       |
| Distributions  from National CineMedia                                              |       | (2.2                                                      | )          |
|                                                                                |       |                                                      |       |
| Balance as of June 28,  2007                                                        |       | $                                                         | —     |   |

 

As a result of the ESA amendment and relatedmodification payment for the quarter ended June 28, 2007 and for the periodfrom February 13, 2007 through June 28, 2007, theatre access fees and otherrevenues received from National CineMedia, offset by the purchase of on-screenadvertising time from National CineMedia for on-screen advertising timeprovided to our beverage concessionaire, totaled approximately $2.1 million and$3.5 million, respectively.  This amount is presented as a component ofother operating revenues in the Company’s financial statements.  As ofJune 28, 2007, approximately $2.8 

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millionand $2.6 million due from/to National CineMedia were included in “Tradeand other receivables, net” and “Accounts payable,” respectively.  As ofDecember 28, 2006, approximately $25.4 million and $0.7 million duefrom/to National CineMedia were included in “Trade and other receivables, net”and “Accounts payable,” respectively.

**4. DEBT OBLIGATIONS**

Debt obligations at June 28, 2007 andDecember 28, 2006 consist of the following (in millions):
| ** **                                                                                                                           | ** ** | **June 28, 2007** | ** ** | **December 28, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Regal 33⁄4%  Convertible Senior Notes                                                                                             |       | $                           | 123.7      |                            | $          | 123.7 |   |
| Regal Cinemas  Senior Credit Facility                                                                                                |       | 1,691.5                     |       | 1,700.0                         |       |
| Regal Cinemas 93¤8%  Senior Subordinated Notes                                                                                  |       | 51.5                        |       | 51.5                            |       |
| Lease financing  arrangements, weighted average interest rate of 11.15%, maturing in various  installments through January 2021 |       | 87.7                        |       | 89.4                            |       |
| Capital lease  obligations, 8.5% to 10.3%, maturing in various installments through December 2017                               |       | 21.1                        |       | 22.4                            |       |
| Other                                                                                                                                |       | 0.8                         |       | 0.9                             |       |
|                                                                                                                                 |       |                        |       |                            |       |
| Total debt  obligations                                                                                                              |       | 1,976.3                     |       | 1,987.9                         |       |
| Less current  portion                                                                                                                |       | (146.2                      | )          | (146.2                          | )          |
|                                                                                                                                 |       |                        |       |                            |       |
| Total debt obligations,  net of current maturities                                                                                   |       | $                           | 1,830.1    |                            | $          | 1,841.7 |   |

 

***Regal 33⁄4%Convertible Senior Notes***—On May 28, 2003, Regalissued $240.0 million aggregate principal amount of 33⁄4% Convertible SeniorNotes due May 15, 2008 (the “Convertible Senior Notes”). Interest on theConvertible Senior Notes is payable semi-annually in arrears on May 15 andNovember 15 of each year, beginning November 15, 2003. TheConvertible Senior Notes are senior unsecured obligations of Regal and rank onparity with all of our existing and future senior unsecured indebtedness andprior to all of our subordinated indebtedness. The Convertible Senior Notes areeffectively subordinated to all of our future secured indebtedness to theextent of the assets securing that indebtedness and to any indebtedness andother liabilities of our subsidiaries. None of our subsidiaries have guaranteedany of our obligations with respect to the Convertible Senior Notes.  Our note holders have the option to converttheir Convertible Senior Notes, in whole or in part, into shares of ourClass A common stock at any time prior to maturity, subject to certain limitations,unless previously purchased by us at the note holder’s option upon a change incontrol, at the then existing conversion price per share.

On June 28, 2007, at the then current conversion priceof $12.8371 per share (which conversion price has been and may be furtheradjusted pursuant to the antidilution provisions of the Convertible SeniorNotes in connection with the payment by Regal of dividends on its commonstock), each $1,000 of aggregate principal amount of Convertible Senior Notesis convertible into approximately 77.8992 shares of our Class A commonstock. Upon conversion, we may elect to deliver cash in lieu of shares ofClass A common stock or a combination of cash and shares of Class Acommon stock. As explained below, with respect to the par amount of theconversion obligation, we intend to deliver cash to note holders uponconversion. The conversion price and the number of shares delivered onconversion are subject to adjustment upon certain events.

In connection with the issuance of the ConvertibleSenior Notes, we used approximately $18.8 million of the net proceeds ofthe offering to enter into convertible note hedge and warrant transactions withrespect to our Class A common stock to reduce the potential dilution fromconversion of the Convertible Senior Notes. Under the terms of the convertiblenote hedge arrangement (the “Convertible Note Hedge”) with Credit Suisse FirstBoston (“CSFB”), we paid $36.2 million for a forward purchase optioncontract under which we are entitled to purchase from CSFB a fixed number ofshares of our Class A common stock (at June 28, 2007, at a price per shareof $12.8371). In the event of the conversion of the Convertible Senior Notes,this forward purchase option contract allows us to purchase, at a fixed

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priceequal to the implicit conversion price of shares issued under the ConvertibleSenior Notes, a number of shares equal to the shares that we issue to a noteholder upon conversion. Settlement terms of this forward purchase option allowthe Company to elect cash or share settlement based on the settlement option itchooses in settling the conversion feature of the Convertible Senior Notes. Weaccounted for the Convertible Note Hedge pursuant to the guidance in EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in a Company’s Own Stock.” Accordingly, the$36.2 million purchase price of the forward stock purchase option contractwas recorded as an increase to consolidated stockholders’ deficit.

We also sold to CSFB a warrant (the “Warrant”) topurchase shares of our Class A common stock. The Warrant is currentlyexercisable for 9,630,160 shares of our Class A common stock at a June 28,2007 exercise price of $14.8120 per share (which exercise price has been andmay be further adjusted pursuant to the antidilution provisions of the Warrantin connection with the payment by Regal of dividends on its common stock). Wereceived $17.4 million in cash from CSFB in return for the sale of thisforward share purchase option contract. CSFB cannot exercise the Warrant unlessand until a conversion event occurs. We have the option of settling the Warrantin cash or shares of our Class A common stock. We accounted for the saleof the Warrant as the sale of a permanent equity instrument pursuant to theguidance in EITF 00-19. Accordingly, the $17.4 million sales price of theforward stock purchase option contract was recorded as a debit to consolidatedstockholders’ deficit.

The Convertible Note Hedge and the Warrant allow us toacquire sufficient Class A common shares from CSFB to meet our obligationto deliver Class A common shares upon conversion by the note holder,unless the Class A common share price exceeds $14.8120 (as of June 28,2007). When the fair value of our Class A common shares exceeds suchprice, the equity contracts no longer have an offsetting economic impact, andaccordingly will no longer be effective as a hedge of the dilutive impact ofpossible conversion.

The Convertible Senior Notes allow us to settle anyconversion, and we intend to settle any conversion, by remitting to the noteholder the accreted value of the note in cash plus the conversion spread (theexcess conversion value over the accreted value) in either cash, shares of ourClass A common stock or a combination of stock and cash. The accountingfor convertible debt with such settlement features is addressed in theconsensus reached by the EITF with respect to the accounting for Instrument Cas set forth in EITF 90-19, “Convertible Bonds with Issuer Option to Settle forCash Upon Conversion.” It is our intent to settle the Convertible Senior Notes’conversion obligations consistent with Instrument C. Because the accreted valueof the Convertible Senior Notes will be settled in cash upon the conversion,only the conversion spread (the excess conversion value over the accretedvalue), which may be settled in stock, will result in potential dilution in ourearnings-per-share computations.

As of June 28, 2007, our note holders had the right,at their option, to convert their Convertible Senior Notes, in whole or inpart, into shares of our Class A common stock, subject to certainlimitations, at the current conversion price of $12.8371. This conversionoption, coupled with the Company’s stated policy to settle any conversion byremitting to the note holder the accreted value of the note in cash, resultedin the classification of the $123.7 million principal amount of theConvertible Senior Notes as a current liability on the accompanying unauditedcondensed consolidated balance sheet as of June 28, 2007.

During the quarter ended March 30, 2006, holders of$4.4 million in principal amount of Convertible Senior Notes exercised theirconversion rights. The Company elected to settle these conversions entirely incash for approximately $5.3 million. As a result of these conversions, theCompany recorded a $0.9 million loss on debt extinguishment during the quarterended March 30, 2006. In addition, during the quarter ended June 29, 2006holders of approximately $100.0 million in principal amount of ConvertibleSenior Notes exercised their conversion rights, and the Company also settledthese conversions entirely in cash for approximately $130.3 million. As aresult of the conversions in the second quarter of 2006, the Company recorded a$31.6 million loss on debt extinguishment (including a related $1.3 millionwrite-off of unamortized debt issue costs) during the quarter ended June 29,2006.

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In connection with the above conversions, the Companyreceived net proceeds of approximately $16.1 million from CSFB attributable tothe Convertible Note Hedge and the Warrant. Such proceeds were also recorded as an increase to additional paid-incapital.

***Regal Cinemas FifthAmended and Restated Credit Agreement***—On October 27,2006, Regal Cinemas entered into a fifth amended and restated credit agreement(the “Amended Senior Credit Facility”) with Credit Suisse, Cayman IslandsBranch (as successor to CSFB), 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. The Revolving Facility has a separate sublimit of $10.0million for short-term loans and a sublimit of $30.0 million for letters ofcredit. The principal balance of the Term Facility in the Amended Senior CreditFacility was higher than the term loan balance in the prior credit facility,and such higher principal balance resulted in net proceeds of $21.2 millionfrom the Amended Senior Credit Facility which were set aside for generalcorporate purposes. Upon the execution of the Amended Senior Credit Facility,Regal recognized a loss on debt extinguishment of approximately $2.3 million,including $0.8 million of third party costs. In addition, approximately$19.2 million of new debt acquisition costs were recorded in connectionwith consummation of the Amended Senior Credit Facility.

The Term Facility will mature on October 27, 2013and the Revolving Facility will mature on October 27, 2011. Interest ispayable (a) in the case of base rate loans, quarterly in arrears, and(b) in the case of Eurodollar rate loans, at the end of each interestperiod, but in no event less often than every 3 months. The Term Facilityamortizes in equal quarterly installments in an aggregate annual amount equalto 1.0% of the original principal amount of the Term Facility during the firstsix years thereof, with the balance payable in two equal installments, thefirst on June 30, 2013 and the second on October 27, 2013.

Borrowings under the Amended Senior Credit Facilitybear interest, at Regal Cinemas’ option, at either a base rate or an AdjustedEurodollar Rate (as defined in the Amended Senior Credit Facility) plus, ineach case, an applicable margin. As of June 28, 2007 and December 28,2006, borrowings of $1,691.5 million and $1,700.0 million,respectively, were outstanding under the Term Facility at an effective interestrate of 6.13% (as of June 28, 2007) and 6.23% (as of December 28, 2006), afterthe impact of the interest rate swaps is taken into account.

Under the Amended Senior Credit Facility, RegalCinemas also established an additional term loan facility (“New IncrementalTerm Facility”) which amends and restates the existing incremental termfacility. Under the terms of the New Incremental Term Facility, Regal Cinemasmay borrow up to $200.0 million in additional funds that would be treated as aterm loan under the Amended Senior Credit Facility without the need to obtainconsent from any lender or any party to the Amended Senior Credit Facility.Borrowing under the New Incremental Term Facility is subject to thesatisfaction of certain conditions set forth in the facility, including, butnot limited to, obtaining commitments from one or more lenders to fund suchadditional amounts. At Regal Cinemas’ option, borrowings under the NewIncremental Term Facility bear interest at an Adjusted Eurodollar Rate or abase rate plus, in either case, an applicable margin that is established at thetime commitments for the New Incremental Term Facility are obtained. Proceedsof Regal Cinemas’ borrowings under the New Incremental Term Facility are to beused solely to fund, or reimburse Regal Cinemas for funding, distributions tothe Company for the purpose of redeeming, repurchasing, acquiring or otherwisesettling the conversion of all or a portion of the Convertible Senior Notes.

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

***Interest Rate Swaps***—Asdescribed in Note 5 to the consolidated financial statements included in

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ourannual report on Form 10-K for the fiscal year ended December 28,2006, during 2004 and 2005, Regal Cinemas entered into a total of five hedgingrelationships via five distinct interest rate swap agreements to hedgeapproximately $1,100.0 million of variable rate liabilities.

As of June 28, 2007, the aggregate fair value of thefive interest rate swaps was determined to be approximately $21.1 million,which has been recorded as a component of “Other Non-Current Assets” with acorresponding amount of $12.8 million, net of tax, recorded to “AccumulatedOther Comprehensive Income.” The interest rate swaps exhibited noineffectiveness for the quarters and two quarters ended June 28, 2007 and June29, 2006.  On June 30, 2007, one of ourinterest rate swaps designated to hedge approximately $200.0 million ofvariable rate obligations matured.

***Other Long-TermObligations—***All other long-term obligations (includingthe Regal Cinemas 93¤8%Senior Subordinated Notes) not explicitly discussed herein are described inNote 5 to the consolidated financial statements included in our annualreport on Form 10-K for the fiscal year ended December 28, 2006 andincorporated by reference herein.

**5. INCOME TAXES**

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

As of June 28, 2007 and December 28, 2006, the grossamount of unrecognized tax benefits was $40.1 million and $32.5 million,respectively.  The increase in grossunrecognized tax benefits of $7.6 million during the two quarters ended June28, 2007 relates to state tax positions that the Company anticipates taking onfuture tax returns relative to activity occurring during the quarters.  Additionally, exclusive of interest andpenalties, it is reasonably possible that gross unrecognized tax benefitsassociated with state tax positions will decrease between $0.5 million and $1.5million within the next 12 months due the expiration of the statute oflimitations.  Unrecognized tax benefitsthat would affect the effective tax rate if recognized were $11.3 million and$3.7 million as of June 28, 2007 and December 28, 2006, respectively.  The remaining unrecognized tax benefits as ofsuch dates would impact goodwill if recognized.

The Company recognizes interest and penalties accruedrelated to unrecognized tax benefits as a component of income tax expense.Effective with the adoption of FIN 48, the Company accrued gross interest andpenalties of approximately $3.2 million. As of June 28, 2007, the Company has accrued gross interest and penaltiesof approximately $3.8 million.

The provision for income taxes of $35.1 million and$11.3 million for the quarters ended June 28, 2007 and June 29, 2006,respectively, reflect effective tax rates of approximately 40.0% and 40.5%,respectively.  The provision for incometaxes of $190.7 million and $18.8 million for the two quarters ended June 28,2007 and June 29, 2006, respectively, reflect effective tax rates ofapproximately 40.4% and 40.3%, respectively. The effective tax rates for the quarters and two quarters ended June 28,2007 and June 29, 2006 reflect the impact of certain non-deductibleexpenses.  The decrease in the effectivetax rate for the quarter ended June 28, 2007 is primarily attributable to theimpact of settlements with state taxing authorities on the effective tax rateduring the quarter ended June 29, 2006.

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

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December28, 2006, respectively, as management believes it is more likely than not thatcertain deferred tax assets will not be realized in future tax periods.Approximately $8.8 million and $33.7 million of the valuation allowance relatesto pre-acquisition deferred tax assets of Edwards and United Artists as of June28, 2007 and December 28, 2006, respectively. Future reductions in thevaluation allowance associated with a change in management’s determination ofthe Company’s ability to realize these deferred tax assets will reduce recordedgoodwill related to such acquisitions. During the quarter ended March 29, 2007, as a result of the NCM Inc. IPOtransaction described in Note 3—“Investment in National CineMedia, LLC,”management determined that the Company would more likely than not realizecertain pre-acquisition deferred tax assets of United Artists.  Accordingly, the valuation allowanceassociated with such pre-acquisition deferred tax assets and goodwill werereduced by $24.9 million during the quarter ended March 29, 2007.

The Company and its subsidiaries collectively fileincome tax returns in the U.S. federal jurisdiction and various statejurisdictions.  In June 2005, the Companywas notified that the Internal Revenue Service (“IRS”) would examine its 2002and 2003 federal income tax returns. During October 2005, the IRS completed itsexamination of the Company’s federal tax returns for such years and the Companyand the IRS agreed to certain adjustments to the Company’s 2002 and 2003federal tax returns. Such adjustments did not have a material impact on theCompany’s provision for income taxes. With limited exceptions, the Company is no longer subject to U.S.federal or state income tax examinations by tax authorities for years before2003.  However, the taxing authoritiesstill have the ability to review the propriety of tax attributes created inclosed tax years if such tax attributes are utilized in an open tax year.

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

***Capital Stock***

Asof June 28, 2007, the Company’s authorized capital stock consisted of:

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

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

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

Of the authorized shares of Class A common stock,18.0 million shares were sold in connection with the Company’s initialpublic offering in May 2002. The Company’s Class A common stock islisted on the New York Stock Exchange under the trading symbol “RGC.” As ofJune 28, 2007, 129,429,191****sharesof Class A common stock were outstanding. Of the authorized shares ofClass B common stock, 23,708,639 shares were outstanding as of June 28,2007, all of which are held by Anschutz Company (“Anschutz”). Each share ofClass B common stock converts into one share of Class A common stockat the option of the holder or upon certain transfers of a holder’sClass B common stock. Each holder of Class B common stock is entitledto ten votes for each outstanding share of Class B common stock owned bythat stockholder on every matter properly submitted to the stockholders fortheir vote. Of the authorized shares of the preferred stock, no shares wereissued and outstanding as of June 28, 2007.  The Class A common stockis entitled to one vote for each outstanding share of Class A common stockon every matter properly submitted to the stockholders for a vote. Except asrequired by law, the Class A and Class B common stock vote togetheras a single class on all matters submitted to the stockholders. The materialterms and provisions of the Company’s certificate of incorporation affectingthe relative rights of the Class A common stock and the Class Bcommon stock are described in Note 9 to the financial statements includedin our annual report on Form 10-K for the fiscal year endedDecember 28, 2006.

***Share RepurchaseProgram***

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

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commonstock within a twelve month period. During the quarter ended June 30, 2005, theCompany repurchased 520,386 shares of its outstanding Class A common stockat an aggregate cost of approximately $10.0 million.  The Company’sboard of directors extended the share repurchase program during the years endedDecember 28, 2006 and December 29, 2005 for additional twelve month periods.Accordingly, the Company can repurchase up to an additional $40.0 millionunder the share repurchase program through September 2007. The Companymade no repurchases of its outstanding Class A common stock during thequarters and two quarters ended June 28, 2007 and June 29, 2006. Repurchasescan be made from time to time as market conditions warrant, through open marketpurchases, negotiated transactions, or in such a manner deemed appropriate bythe Company. Treasury shares are retired upon repurchase. At retirement, theCompany records treasury stock purchases at cost with any excess of cost overpar value recorded as a reduction of additional paid-in capital.

***Warrants***

Other than disclosed in Note 4—“Debt Obligations”and Note 9—“Earnings Per Share,” no warrants to acquire the Company’s commonstock were outstanding as of June 28, 2007.

***Share-BasedCompensation***

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

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

*Stock Options*

On March 5, 2007, Regal declared an extraordinarycash dividend of $2.00 per share on each outstanding share of its Class Aand Class B common stock. Stockholders of record at the close of businesson March 28, 2007 were paid this dividend on April 13, 2007.   Inconnection with the extraordinary cash dividend and pursuant to the antidilutionadjustment terms of the Incentive Plan, the exercise price and the number ofshares of Class A common stock subject to options held by the Company’soption holders were adjusted to prevent dilution and restore their economicposition to that existing immediately before the extraordinary dividend. Theantidilution adjustments made with respect to such options resulted in adecrease in the range of exercise prices, from $2.4407 to $16.1768 per share,an increase in the aggregate number of shares issuable upon exercise of suchoptions by 269,213, and an increase in the total number of authorized sharesunder the Plan to 18,269,213. As of June 28, 2007 and after giving effect tothe antidilution adjustments, the Company had outstanding options to purchase atotal of 739,711 shares of Class A common stock under the Incentive Plan,and 3,068,096 shares remaining available for future issuance under theIncentive Plan. Stock option information presented herein has been adjusted togive effect to the extraordinary dividend. There were no accountingconsequences for changes made to reduce the exercise prices and increase thenumber of shares underlying options as a result of the extraordinary cashdividend because (1) the aggregate intrinsic value of the awardsimmediately after the extraordinary dividend was not greater than the aggregateintrinsic value of the awards immediately before the extraordinary dividend and(2) the ratio of the exercise price per share to the market value pershare was not reduced.

There were no stock options granted during thequarters and two quarters ended June 28, 2007 and June 29, 2006.  Duringthe quarters ended June 28, 2007 and June 29, 2006, the Company recognizedapproximately $0.3 million and $1.6 million of share-based compensation expenserelated to stock options.  During the twoquarters ended June 28, 2007 and June 29, 2006, the Company recognizedapproximately 

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$1.2million and $3.3 million of share-based compensation expense related to stockoptions.  Such expense is presented as a component of general andadministrative expenses for the quarters and two quarters ended June 28, 2007and June 29, 2006.  At June 28, 2007,there was $0.6 million of unrecognized compensation cost related to theseshare-based payments.

We receive a tax deduction for certain stock optionexercises during the period the options are exercised, generally for the excessof the price at which the stock is sold over the exercise price of theoptions.  Prior to adoption of SFAS 123R, we reported all tax benefitsresulting from the exercise of stock options as operating cash flows in ourconsolidated statements of cash flows. In accordance with SFAS 123R, we arerequired to report excess tax benefits from the award of equity instruments asfinancing cash flows.  Excess tax benefits are recorded when a deductionreported for tax return purposes for an award of equity instruments exceeds thecumulative compensation cost for the instruments recognized for financialreporting purposes.  For the two quarters ended June 28, 2007, ourunaudited condensed consolidated statement of cash flows reflects$14.3 million of excess tax benefits as financing cash flows. Netcash proceeds from the exercise of stock options were $14.8 million forthe two quarters ended June 28, 2007.  The actual income tax benefit realized from stock option exercises is$16.8 million for the same period.  Forthe two quarters ended June 29, 2006, our unaudited condensed consolidatedstatement of cash flows reflects $9.9 million of excess tax benefits asfinancing cash flows. Net cash proceeds from the exercise of stock optionswere $11.9 million for the two quarters ended June 29, 2006.   The actual income tax benefit realized fromstock option exercises was $12.1 million for the same period.

The following table represents stock option activityfor the two quarters ended June 28, 2007: 
| ** **                                                                                                                                            | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Contract Life** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                            | ** ** | ** **                 | ** ** | ** **                                  | ** ** | ** **                                 | ** ** |
| Outstanding  options at beginning of period                                                                                                           |       | 3,095,601                  |       | $                                           | 7.03       |                                       | 5.48Yrs    |   |
| Granted                                                                                                                                               |       | —                     |       | —                                      |       |                                       |       |
| Exercised                                                                                                                                             |       | (2,622,374                 | )          | 5.64                                        |       |                                       |       |
| Forfeited                                                                                                                                             |       | (2,729                     | )          | 17.38                                       |       |                                       |       |
| Antidilution  adjustments made to outstanding options in connection with the extraordinary  dividend declared during the quarter ended March 29, 2007 |       | 269,213                    |       | 6.36                                        |       |                                       |       |
| Outstanding  options at end of period                                                                                                                 |       | 739,711                    |       | $                                           | 9.36       |                                       | 5.27Yrs    |   |
| Exercisable options at  end of period                                                                                                                 |       | 581,209                    |       | $                                           | 8.16       |                                       | 5.03Yrs    |   |

 

*Restricted Stock*

As described in Note 9 to the financial statementsincluded in our annual report on Form 10-K for the fiscal year endedDecember 28, 2006, the Company maintains a restricted stock program whichprovides for restricted stock awards to officers, directors and key employees.Under the restricted stock program, common stock of the Company may be grantedat nominal cost to officers, directors and key employees, subject to acontinued employment restriction. On January 10, 2007, 164,647 shares weregranted under the restricted stock program at nominal cost to officers, keyemployees and certain directors.  The closing price of our Class A commonstock on the date of grant was $22.25 per share.

During the quarters ended June 28, 2007 and June 29,2006, the Company recognized approximately $0.7 million and $0.4 million,respectively, of share-based compensation expense related to restricted sharegrants.  During the two quarters ended June 28, 2007 and June 29, 2006,the Company recognized approximately $1.5 million and $0.7 million,respectively, of share-based compensation expense related to restricted sharegrants. Such expense is presented as a component of general andadministrative expenses. The compensation expense for these awards wasdetermined based on the market price of our stock at the date of grant appliedto the total numbers of shares that were anticipated to fully vest.

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The following table represents the shares ofrestricted stock that were granted and outstanding as of June 28, 2007 and June29, 2006:
| ** **                       | ** ** | **Two Quarters  Ended  June 28, 2007** | ** ** | **Two Quarters  Ended  June 29, 2006** | ** ** |
|----------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                             |       |                                                  |       |                                                  |       |
| Restricted  stock:               |       |                                                  |       |                                                  |       |
| Granted during  the period ended |       | 164,647                                               |       | 181,307                                               |       |
| Outstanding, as of               |       | 481,030                                               |       | 332,017                                               |       |

 

During the two quarters ended June 28, 2007, the Companypaid two cash dividends of $0.30 on each share of outstanding restricted stocktotaling approximately $0.3 million.  In addition, on March 5,2007, Regal declared an extraordinary cash dividend of $2.00 per share on eachoutstanding restricted share. Restricted stockholders of record at the close ofbusiness on March 28, 2007 were paid this dividend on April 13, 2007.  Therestricted stock dividend was recorded as a $1.0 million increase tostockholders’ deficit upon declaration.

*Performance Share Units*

As described in Note 9 to the financial statementsincluded in our annual report on Form 10-K for the fiscal year endedDecember 28, 2006, the Incentive Plan also provides for grants in the formof performance share units to officers, directors and key employees.Performance share agreements are entered into between the Company and eachgrantee of performance share units. Pursuant to the terms and conditions of thePerformance Agreement, grantees will be issued shares of restricted commonstock of the Company in an amount determined by the attainment of Companyperformance criteria set forth in the 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.

On January 10, 2007, 188,789 performance shares weregranted under our restricted stock program at nominal cost to officers and keyemployees.  The closing price of our Class A common stock on the date ofgrant was $22.25 per share. Each performance share represents the right toreceive from 0% to 175% of the target numbers of shares of restricted commonstock. The number of shares of restricted common stock earned will bedetermined by comparing the actual average annual total shareholder return(stock price appreciation plus dividend yield) attained (“TSRA”) on Regal’sClass A common stock on January 10, 2010 (the third anniversary of thegrant date) to the target TSRA set forth in the Performance Agreement. A targetnumber of shares of restricted common stock to be earned by each eligiblegrantee has been established with respect to the 2007 performance share grantsand is primarily based on the grantee’s employee classification and basecompensation, referred to as “target long-term incentive” (“Target LTI”) below.In addition, these awards are subject to an additional one-year vestingrequirement. The Company has developed a performance range around the target TSRAand the number of shares of restricted stock that will be issued will be basedon actual TSRA, according to the following schedule:
| **Average Annual Shareholder Return** | ** ** | **Target Shares of Restricted Stock** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| 12.5% < TSRA < 15.0%                           |       | 50%  of Target LTI                                        |       |
|                                                 |       |                                                      |       |
| 15.0% < TSRA < 17.5%                           |       | 100%  of Target LTI                                       |       |
|                                                 |       |                                                      |       |
| 17.5% < TSRA < 20.0%                           |       | 125%  of Target LTI                                       |       |
|                                                 |       |                                                      |       |
| 20.0% < TSRA < 25.0%                           |       | 150%  of Target LTI                                       |       |
|                                                 |       |                                                      |       |
| 25.0% < TSRA                                      |       | 175% of Target LTI                                        |       |

 

Since the performance shares contain a marketcondition which should be reflected in the grant date fair value of an award inaccordance with the provisions of SFAS 123R, the performance shares weremeasured on the date of grant using a Monte Carlo simulation model. The MonteCarlo simulation model utilizes multiple input variables that determine theprobability of satisfying the market condition stipulated

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in theaward grant and calculates the fair market value for the performance sharesgranted. On January 10, 2007, the aggregate fair value of the 2007performance share awards was determined to be $1.8 million, which includesrelated dividends on shares ultimately earned and paid on January 10, 2010. Thefair value of the performance share awards will be amortized as compensationexpense over the expected term of the awards. The key assumptions used forvaluing the 2007 performance share awards follow:

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

 

Expected volatility is based on historical volatilityof the Company’s dividend adjusted common stock price measured daily over athree year period ending on January 10, 2007.  The risk-free interest rateis set equal to the yield on three-year (constant maturity) U.S. Governmentbonds as of January 10, 2007. The expected dividend yield assumption is basedon the Company’s history and expectation of future dividend payouts. Thedividend yield is included in the calculation of returns for measurementagainst the performance goals defined above.

During the quarters ended June 28, 2007 and June 29,2006, the Company recognized approximately $0.4 million and $0.1 million ofshare-based compensation expense related to performance share grants.  Duringthe two quarters ended June 28, 2007 and June 29, 2006, the Company recognizedapproximately $0.8 million and $0.1 million of share-based compensation expenserelated to performance share grants. Such expense is presented as a component of general and administrativeexpenses. The following tables summarize information about the Company’sperformance shares activity: 
|                                  | ** ** | **Two Quarters  Ended  June 28, 2007** | ** ** |
|----------------------------------|------------|-------------------------------------------------------|------------|
| Number of  performance shares:   |       |                                                  |       |
| Outstanding at beginning of year |       | 383,310                                               |       |
| Granted (based on target TSRA)   |       | 188,789                                               |       |
| Forfeited                        |       | (1,159                                                | )          |
| Outstanding as of June  28, 2007 |       | 570,940                                               |       |

 

The above table does not reflect the maximum orminimum number of shares of restricted stock contingently issuable. Anadditional 428,205 shares of restricted stock could be issued providing themaximum TSRA is met. 

**7. COMMITMENTS AND CONTINGENCIES**

***Sale-Leaseback Transactions***

The Company’s sale-leaseback transactions aredescribed in Note 6 to the consolidated financial statements included inour annual report on Form 10-K for the fiscal year ended December 28,2006.

***Other***

Ourtheatres must comply with Title III of the Americans with Disabilities Act of1990 (the “ADA”) to the extent that such properties are “public accommodations”and/or “commercial facilities” as defined by the ADA. Compliance with the ADArequires that public accommodations “reasonably accommodate” individuals withdisabilities and that new construction or alterations made to “commercialfacilities” conform to accessibility guidelines unless “structurallyimpracticable” for new construction or technically infeasible for alterations.Non-compliance with the ADA could result in the imposition of injunctiverelief, fines, awards of damages to private litigants and additional capital expendituresto remedy such non-compliance.

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In prior years, private litigants and the Departmentof Justice (the “DOJ”) had filed claims against us or our subsidiaries allegingthat a number of our theatres with stadium seating violated the ADA 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. Over the next four years, we anticipate that we willincur capital costs to modify our theatres in accordance with the DOJsettlement arrangements in the aggregate of up to $5.0 million. From timeto time, we receive claims that the stadium seating offered by our theatresallegedly violates the ADA. In these instances, we seek to resolve or dismissthese claims based on the terms of the DOJ settlement or under applicable ADAstandards.

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

We believe that we are in substantial compliance withall current applicable regulations relating to accommodations for the disabled.We intend to comply with future regulations in this regard, and except as setforth above, we do not currently anticipate that compliance will require us toexpend substantial funds. Our theatre operations are also subject to federal,state and local laws governing such matters as wages, working conditions,citizenship and health and sanitation requirements. We believe that we are insubstantial compliance with all of such laws.

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

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

**8. RELATED PARTY TRANSACTIONS**

During the quarter and two quarters ended June 28,2007, Regal Cinemas, incurred approximately $1.0 million and$2.1 million, respectively, of expenses payable to an Anschutz affiliate,Qwest Communications and its subsidiaries, for telecommunication services. Inaddition, Regal Cinemas incurred approximately $0.1 million of expensespayable to Anschutz affiliates for certain advertising services during thequarter and two quarters ended June 28, 2007. Related party amounts for thequarter and two quarters ended June 29, 2006 were comparable to the 2007 amounts.

During the quarters and two quarters ended June 28,2007 and June 29, 2006, Regal Cinemas received less than $0.1 million froman Anschutz affiliate for rent and other expenses related to a theatrefacility.  In addition, during the two quarters ended June 29, 2006, Regalreceived less than $0.1 million for travel costs incurred during 2005 on behalfof an Anschutz affiliate.

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During 2005 and 2006, National CineMedia entered intovarious lease assignment and sublease arrangements with RCM pursuant to whichNational CineMedia leases its regional offices in Eden Prairie, Minnesota,Chicago, Illinois and New York, New York.  The amounts paid by NationalCineMedia under these arrangements totaled approximately $0.2 million for thequarter ended June 28, 2007.  Related party amounts for these arrangementsfor the quarter ended June 29, 2006 were comparable to the 2007 amounts.

Regal has held ongoingdiscussions with an Anschutz affiliate regarding a new theatre developmentlocated in Los Angeles, California.  Asof June 28, 2007, Regal contemplates entering into a management agreement withthe Anschutz affiliate to manage the theatre site on their behalf.  The ultimate financial terms of themanagement agreement will be approved by the board of directors.  As of June 28, 2007,****Regal has incurred approximately $0.6million of out of pocket costs (primarily for legal fees and architecturalplans) in connection with the project. The Anschutz affiliate has agreed to reimburse Regal for such fees andto acquire the architectural plans at cost.

**9. EARNINGS PER SHARE**

Basic earnings per share is computed on the basis ofthe weighted average number of the common shares outstanding. Diluted earningsper share is computed on the basis of the weighted average number of commonshares outstanding plus the effect of potentially dilutive common stockoptions, the Convertible Note Hedge and Warrant and restricted stock using thetreasury stock method. The components of basic and diluted earnings per shareare as follows (in millions, except share and per share data):
| ** **                                           | ** ** | **Quarter Ended  June 28, 2007** | ** ** | **Quarter Ended  June 29, 2006** | ** ** | **Two Quarters   Ended  June 28, 2007** | ** ** | **Two Quarters  Ended  June 29, 2006** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Net income                                           |       | $                                               | 52.7       |                                            | $          | 16.6                                                        |       | $                                                     | 281.8      |   | $ | 27.8 |   |
| Weighted average  shares outstanding (in thousands): |       |                                            |       |                                            |       |                                                        |       |                                                  |       |
| Basic:                                               |       | 151,791                                         |       | 149,016                                         |       | 151,043                                                     |       | 148,394                                               |       |
| Add common stock equivalents                         |       | 8,365                                           |       | 7,447                                           |       | 7,636                                                       |       | 6,859                                                 |       |
|                                                 |       |                                            |       |                                            |       |                                                        |       |                                                  |       |
| Diluted:                                             |       | 160,156                                         |       | 156,463                                         |       | 158,679                                                     |       | 155,253                                               |       |
| Earnings per  share                                  |       |                                            |       |                                            |       |                                                        |       |                                                  |       |
| Basic:                                               |       | $                                               | 0.35       |                                            | $          | 0.11                                                        |       | $                                                     | 1.87       |   | $ | 0.19 |   |
| Diluted:                                             |       | $                                               | 0.33       |                                            | $          | 0.11                                                        |       | $                                                     | 1.78       |   | $ | 0.18 |   |

 

Common stock equivalents consist principally of stockoptions, restricted stock and the impact of the conversion spread and Warrantdescribed below. There were no antidilutive common stock equivalentsoutstanding as of June 28, 2007 and June 29, 2006.

The Convertible Senior Notes discussed in Note 4—“Debt Obligations” allow us to settle any conversion, and we intend to settleany conversion, by remitting to the note holder the accreted value of the notein cash, while settling the conversion spread in either cash, shares of ourClass A common stock or a combination of stock and cash. The accountingfor convertible debt with such settlement features is addressed in theconsensus reached by the EITF with respect to the accounting for Instrument Cas set forth in EITF 90-19, “Convertible Bonds with Issuer Option to Settle forCash Upon Conversion.” It is our intent to settle the Convertible Senior Notes’conversion obligations consistent with Instrument C. Because the accreted valueof the Convertible Senior Notes will be settled in cash upon the conversion,only the conversion spread, which may be settled in stock, will result inpotential dilution in our earnings-per-share computations under currentaccounting standards.  As of June 28,2007, our note holders had the right, at their option, to convert theirConvertible Senior Notes, in whole or in part, into shares of our Class Acommon stock, subject to certain limitations, at the then conversion price of$12.8371. Utilizing the treasury stock method, the conversion spread resultedin dilution of approximately 3.9 million shares and 3.5 million shares inour diluted earnings per share computations for the quarters ended June 28,2007 and June 29, 2006.

In addition, as described in Note 4—“DebtObligations,” we entered into the Convertible Note Hedge and sold the Warrantwhich, in combination, have the effect of reducing the dilutive impact of the 

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ConvertibleSenior Notes by increasing the effective conversion price for these notes fromour economic perspective to $14.8120 at June 28, 2007. Statement of FinancialAccounting Standards (“SFAS”) No. 128, “Earnings Per Share,” however,requires us to analyze the impact of the Convertible Note Hedge and Warrant ondiluted earnings per share separately. As a result, the purchase of theConvertible Note Hedge is excluded because its impact will always beantidilutive. SFAS No. 128 further requires that the impact of the sale ofthe Warrant be computed using the treasury stock method. The Warrant resultedin dilution of approximately 3.0 million shares and 1.9 millionshares in our diluted earnings per share computations for the quarters endedJune 28, 2007 and June 29, 2006, respectively. As of June 28, 2007, the maximumnumber of shares that could potentially be included under the Warrant is9.6 million.

**10. RECENT ACCOUNTING PRONOUNCEMENTS**

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

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

**11. SUBSEQUENT EVENTS**

On July 26, 2007, the Company declared a cash dividendof $0.30 per share on each share of the Company’s Class A and Class Bcommon stock (including outstanding restricted stock), payable on September 20,2007, to stockholders of record on September 12, 2007.

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

*Some of the information in thisQuarterly Report on Form 10-Q includes “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Allstatements other than statements of historical facts included in thisForm 10-Q, including, without limitation, certain statements under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”, mayconstitute forward-looking statements. In some cases you can identify these “forward-lookingstatements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “potential” or “continue” or the negativeof those words and other comparable words. These forward-looking statementsinvolve risks and uncertainties. Our actual results could differ materiallyfrom those indicated in these statements as a result of certain factors as morefully discussed under the heading “Risk Factors” contained in our annual reporton Form 10-K filed on February 26, 2007 with the Commission (FileNo. 001-31315) for the Company’s fiscal year ended December 28, 2006. Thefollowing discussion*

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*and analysis should be read in conjunction with theunaudited condensed consolidated financial statements and notes theretoincluded herein.*

**The Company**

We conduct our operations through our wholly ownedsubsidiaries. We operate the largest and most geographically diverse theatrecircuit in the United States, consisting of 6,368 screens in 529 theatres in 39states and the District of Columbia as of June 28, 2007. We believe the size,reach and quality of our theatre circuit provide an exceptional platform torealize economies of scale from our theatre operations.  We also maintainan investment in National CineMedia, which has primarily concentrated itsefforts on the expansion of in-theatre advertising and the creation ofcomplementary business lines that leverage the existing operating personnel,asset and customer bases of its theatrical exhibition partners, which includesus, AMC and Cinemark.  The Company manages its business under one reportablesegment: theatre exhibition operations.

We generate revenues primarily from admissions andconcession sales. Additional revenues are generated by our vendor marketingprograms and electronic video games located adjacent to the lobbies of certainof our theatres. In addition, National CineMedia provides us with revenues fromits sale of on-screen advertising, rental of theatres for business meetings andconcerts and other events. Film rental costs depend on a variety of factorsincluding the prospects of a film and the popularity of a film and such filmrental costs generally increase as the admissions revenues generated by a filmincrease. Because we purchase certain concession items, such as fountain drinksand popcorn, in bulk and not pre-packaged for individual servings, we are ableto improve our margins by negotiating volume discounts. Other operatingexpenses consist primarily of theatre labor and occupancy costs.

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

On March 29, 2005, Regal and AMC announced thecombination of the operations of RCM and AMC’s subsidiary, NCN, into a newjoint venture company, National CineMedia. On July 15, 2005, Cinemark,through a wholly owned subsidiary, acquired a 20.7% interest in NationalCineMedia. On February 13, 2007, NCM Inc., a newly formed entity thatserves as the sole manager of National CineMedia, completed an IPO of itscommon stock. In connection with the IPO of NCM Inc., RCH, AMC and Cinemarkamended and restated the operating agreement of National CineMedia and otherancillary agreements.  As discussed further in Note 3—“Investment inNational CineMedia, LLC,” as a result of the transactions completed inconnection with the IPO, the Company recognized a gain of approximately $350.7million during the quarter ended March 29, 2007.

On February 12, 2007, we, along with AMC andCinemark entered into a joint venture company known as Digital CinemaImplementation Partners, LLC, a Delaware limited liability company (“DCIP”), toexplore the possibility of implementing digital cinema in our theatres and tocreate a financing model and establish agreements with major motion picturestudios for the implementation of digital cinema. Travis Reid, former presidentand chief executive officer of Loews Theatres, is the chief executive officerof DCIP and DCIP has engaged J.P. Morgan Securities Inc. to assist with thereview of a business plan for digital cinema and with identifying andevaluating potential financing and capital structure alternatives. Futuredigital cinema developments will be managed by DCIP, subject to the approval ofus, AMC and Cinemark.  The Company’s investment (consisting of contributedcash) in DCIP totaled approximately $1.5 million as of June 28, 2007. As ofJune 28, 2007, we expect to install digital cinema systems in our new theatresbeginning in the fourth fiscal quarter of 2007.  In addition, we expect tobegin converting our existing theatres from 35 mm film projection to digitalprojection during the first half of 2008 and intend to complete the conversionof our circuit in approximately three to four years.  DCIP is continuingto work with film studios and financial institutions to negotiate and finalizethe related financing plans.

During the quarterended June 28, 2007, the Company sold its equity interest in Fandango, Inc. forproceeds of $28.3 million.  As aresult of this transaction, the Company recognized a gain on the sale ofapproximately $28.3 million ($17.0 million after tax).  In connection with the sale, the Companyagreed to 

23

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amend its existingcontract with Fandango, Inc. in exchange for an amendment fee totaling $5.5million.  This amount has been recordedas deferred revenue and will be amortized to revenue on a straight-line basisover the six year term of the amendment.

For a summary of industry trends as well as otherrisks and uncertainties relevant to the Company, see “Business—IndustryOverview and Trends” and “Risk Factors” contained in our annual report on Form10-K for the fiscal year ended December 28, 2006 and “Results of Operations”below.

**Results of Operations**

Based on our review of industry sources, national boxoffice revenues for the time period that corresponds to Regal’s second fiscalquarter of 2007 were estimated to have increased by approximately 1.0% incomparison to the second fiscal quarter of 2006.  The industry achievedthese results with ticket price increases and strong attendance from key secondquarter 2007 film releases, such as *Spider-Man3, Pirates of the Caribbean: At World’s End*and*Shrek the Third*,offset by weak attendance from mid-tier films exhibited during the quarter.

Our total revenue for the quarter ended June 28, 2007(“Q2 2007 Period”) was $683.4 million, consisting of $457.9 million of admissionsrevenues, $197.4 million from concessions revenues and $28.1 million of otheroperating revenues, and represented a 0.2% decrease from total revenues of$684.6 million for the quarter ended June 29, 2006 (“Q2 2006 Period”).

Our Q2 2007 Period admissions revenues, whichincreased by approximately 1.2% over the Q2 2006 Period, were favorablyimpacted by a 6.9% increase average ticket prices, somewhat offset by a 5.4%decrease in attendance.  The increase inthe Q2 2007 Period average ticket price was primarily attributable to periodicpricing reviews conducted by the Company, which includes analysis of variousfactors, including general inflationary trends and local market conditions, andthe mix of film product exhibited during the Q2 2007 Period.  The decrease in the Q2 2007 Period attendancewas primarily attributable weak attendance from mid-tier films exhibited duringthe Q2 2007 Period, partially offset by strong attendance from key Q2 2007Period film releases, such as *Spider-Man 3,Pirates of the Caribbean: At World’s End*and*Shrek the Third*.  Our Q2 2007 Period attendance alsobenefited from approximately 125 new screens added since the end of the Q2 2006Period and the 58 screens acquired from AMC during the third fiscal quarter of2006, partially offset by the closure of approximately 198 underperformingscreens subsequent to the end of the Q2 2006 period.  Based on our review of certain industrysources, the increase in our admissions revenues was in line with the industry’sresults for the Q2 2007 Period as compared to the Q2 2006 Period.

In addition, during the Q2 2007 Period, we experiencedgrowth in average concession revenues per patron and a decline in otheroperating revenues. The growth in average concession revenues per patron was primarilyattributable to price increases, concession-friendly films exhibited during theQ2 2007 Period, such as *Pirates of theCaribbean: At World’s End, Spider-Man 3*and*Shrek the Third,*anda favorable mix of concession products sold during the Q2 2007 Period.  The decrease in other operating revenues inthe Q2 2007 Period was primarily attributable to a modification of the paymentarrangement with National CineMedia (effective upon consummation of the IPO ofNCM Inc. on February 13, 2007) described in further detail under Note 3—“Investmentin National CineMedia, LLC.”

Income from operations decreased 6.7% to$83.0 million for the Q2 2007 Period compared to $89.0 million in theQ2 2006 Period. The net decrease in income from operations during the Q2 2007Period was primarily attributable to lower other operating revenues andincreases in certain operating expense items described in further detail below,partially offset by incremental admissions and concessions revenues describedabove. Net income increased to $52.7 million in the Q2 2007 Periodcompared to net income of $16.6 million in the Q2 2006 Period. Earningsper diluted share also increased to $0.33 for the Q2 2007 Period compared to$0.11 during the Q2 2006 Period.  The increases in net income and earningsper diluted share were primarily due to a $28.3 million gain ($17.0 millionafter related tax effects) resulting from transactions completed in connectionwith the sale of our equity interest in Fandango, Inc. (see Note 1—“TheCompany and Basis of Presentation” for further discussion) and the impact of a$31.6 million loss 

24

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($19.0million after related tax effects) on debt extinguishment recorded in the Q22006 Period in connection with conversions of approximately $100.0 millionin principal amount of the Company’s Convertible Senior Notes, partially offsetby a net decrease in operating income.

During the Q2 2007 Period and the two quarters endedJune 28, 2007 (“Fiscal 2007 Period”), we continued to make progress withrespect to the following strategic initiatives:

·                  OnFebruary 13, 2007, NCM Inc., a newly formed entity that serves as the solemanager of National CineMedia, completed an IPO of its common stock.  NCM Inc. sold 38.0 million shares of itscommon stock for $21 per share in the IPO, less underwriting discounts and expenses.  In connection with the series of transactionscompleted in connection with the IPO, we received gross proceeds totaling$628.3 million.  After the payment ofcurrent taxes, we estimate net proceeds from the transactions to totalapproximately $445.0 million. The Company used a portion of the net 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 ofbusiness on March 28, 2007 were paid this $302.0 million dividend on April 13,2007.  We are currently exploring alternatives for use of the remainingproceeds, and may use some or all of the remaining proceeds for strategicacquisitions, stock repurchases or other corporate uses.  See Note 3—“Investmentin National CineMedia, LLC” for additional discussion of these transactions.

·                  During the quarter ended June 28,2007, the Company sold its equity interest in Fandango, Inc. for proceeds ofapproximately $28.3 million.  As a resultof this transaction, the Company recognized a gain on the sale of approximately$28.3 million ($17.0 million after tax). In connection with the sale, the Company agreed to amend its existingcontract with Fandango, Inc. in exchange for an amendment fee totaling $5.5million.

·                  We demonstratedour commitment to providing incremental value to our stockholders. Total cashdividends distributed to our stockholders during the Fiscal 2007 Period totaledapproximately $393.2 million, including an extraordinary cash dividend of$2.00 per share on each outstanding share of its Class A and Class B commonstock, including outstanding restricted stock.

·                  We opened 4 newtheatres with 65 screens, added 3 screens through expansion of an existingtheatre and closed 4 underperforming theatres with 40 screens, ending the Q22007 Period with 529 theaters and 6,368 screens.

The following table sets forth the percentage of totalrevenues represented by certain items included in our consolidated statementsof income for the Q2 2007 Period, the Q2 2006 Period, the Fiscal 2007 Periodand the two quarters ended June 29, 2006 (“Fiscal 2006 Period”) (dollars andattendance in millions, except average ticket prices and average concession perpatron):

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| ** **                                                                                                                                                                                                                      | ** ** | **Q2 2007 Period** | ** ** | **Q2 2006 Period** | ** ** | **Fiscal 2007 Period** | ** ** | **Fiscal 2006 Period** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                                                      | ** ** | **$**                        | ** ** | **% of  Revenue**       | ** ** | **$**                            | ** ** | **% of  Revenue**           | ** ** | **$** | ** ** | **% of  Revenue** | ** ** | **$** | ** ** | **% of  Revenue** | ** ** |
| Revenues:                                                                                                                                                                                                                       |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Admissions                                                                                                                                                                                                                      |       | $                            | 457.9      |                         | 67.0       | %                                | $          | 452.5                            |       | 66.1 | % | $ | 884.6 |   | 67.6 | % | $ | 844.5 |   | 66.5 | % |
| Concessions                                                                                                                                                                                                                     |       | 197.4                        |       | 28.9                         |       | 185.2                            |       | 27.1                             |       | 365.7 |   | 28.0 |   | 343.8 |   | 27.1 |   |
| Other operating revenue                                                                                                                                                                                                         |       | 28.1                         |       | 4.1                          |       | 46.9                             |       | 6.8                              |       | 58.1 |   | 4.4 |   | 81.4 |   | 6.4 |   |
|                                                                                                                                                                                                                            |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total revenue                                                                                                                                                                                                                   |       | 683.4                        |       | 100.0                        |       | 684.6                            |       | 100.0                            |       | 1,308.4 |   | 100.0 |   | 1,269.7 |   | 100.0 |   |
| Operating  expenses:                                                                                                                                                                                                            |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Film rental and advertising costs(1)                                                                                                                                                                                            |       | 252.4                        |       | 55.1                         |       | 244.6                            |       | 54.1                             |       | 470.4 |   | 53.2 |   | 441.6 |   | 52.3 |   |
| Cost of concessions(2)                                                                                                                                                                                                          |       | 27.9                         |       | 14.1                         |       | 28.8                             |       | 15.6                             |       | 52.9 |   | 14.5 |   | 52.9 |   | 15.4 |   |
| Rent expense(3)                                                                                                                                                                                                                 |       | 83.3                         |       | 12.2                         |       | 79.8                             |       | 11.7                             |       | 164.3 |   | 12.6 |   | 157.4 |   | 12.4 |   |
| Other operating expenses(3)                                                                                                                                                                                                     |       | 176.2                        |       | 25.8                         |       | 168.6                            |       | 24.6                             |       | 341.1 |   | 26.1 |   | 327.2 |   | 25.8 |   |
| General and administrative expenses   (including share-based compensation expense of $1.4 and $2.1 for the Q2 2007  Period and the Q2 2006 Period, and $3.5 and $4.1 for the Fiscal 2007 Period  and the Fiscal 2006 Period)(3) |       | 16.8                         |       | 2.5                          |       | 17.1                             |       | 2.5                              |       | 32.8 |   | 2.5 |   | 33.0 |   | 2.6 |   |
| Depreciation and amortization(3)                                                                                                                                                                                                |       | 46.1                         |       | 6.7                          |       | 50.7                             |       | 7.4                              |       | 92.4 |   | 7.1 |   | 100.4 |   | 7.9 |   |
| Net (gain) loss on disposal and impairment of  operating assets(3)                                                                                                                                                              |       | (2.6                         | )          | (0.4                         | )          | 5.1                              |       | 0.7                              |       | 2.8 |   | 0.2 |   | 10.8 |   | 0.9 |   |
| Equity in earnings of joint venture including former  employee compensation(3)                                                                                                                                                  |       | 0.3                          |       | —                       |       | 0.9                              |       | 0.1                              |       | 3.7 |   | 0.3 |   | 6.7 |   | 0.5 |   |
|                                                                                                                                                                                                                            |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total operating expenses(3)                                                                                                                                                                                                     |       | 600.4                        |       | 87.9                         |       | 595.6                            |       | 87.0                             |       | 1,160.4 |   | 88.7 |   | 1,130.0 |   | 89.0 |   |
|                                                                                                                                                                                                                            |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Income from operations(3)                                                                                                                                                                                                       |       | 83.0                         |       | 12.1                         |       | 89.0                             |       | 13.0                             |       | 148.0 |   | 11.3 |   | 139.7 |   | 11.0 |   |
| Interest expense, net(3)                                                                                                                                                                                                        |       | 25.5                         |       | 3.7                          |       | 29.4                             |       | 4.3                              |       | 56.5 |   | 4.3 |   | 60.5 |   | 4.8 |   |
| Gain on NCM transaction(3)                                                                                                                                                                                                      |       | —                       |       | —                       |       | —                           |       | —                           |       | 350.7 |   | 26.8 |   | — |   | — |   |
| Gain on sale of Fandango interest(3)                                                                                                                                                                                            |       | 28.3                         |       | 4.1                          |       | —                           |       | —                           |       | 28.3 |   | 2.2 |   | — |   | — |   |
| Loss on debt extinguishment(3)                                                                                                                                                                                                  |       | —                       |       | —                       |       | 31.6                             |       | 4.6                              |       | — |   | — |   | 32.5 |   | 2.6 |   |
| Provision for income taxes(3)                                                                                                                                                                                                   |       | 35.1                         |       | 5.1                          |       | 11.3                             |       | 1.7                              |       | 190.7 |   | 14.6 |   | 18.8 |   | 1.5 |   |
| Net income(3)                                                                                                                                                                                                                   |       | 52.7                         |       | 7.7                          |       | 16.6                             |       | 2.4                              |       | 281.8 |   | 21.5 |   | 27.8 |   | 2.2 |   |
| Attendance                                                                                                                                                                                                                      |       | 61.7                         |       |                         | *          | 65.2                             |       |                             | *          | 120.3 |   |   | * | 123.2 |   |   | * |
| Average ticket price(4)                                                                                                                                                                                                         |       | $                            | 7.42       |                         |       | *                                | $          | 6.94                             |       |   | * | $ | 7.35 |   |   | * | $ | 6.85 |   |   | * |
| Average  concession per patron(5)                                                                                                                                                                                               |       | $                            | 3.20       |                         |       | *                                | $          | 2.84                             |       |   | * | $ | 3.04 |   |   | * | $ | 2.79 |   |   | * |

 

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*              *Not meaningful*

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

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

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

(4)                                  Calculated as admissions revenue/attendance.

(5)                                  Calculated as concessions revenue/attendance.

***Q2 2007 Period Compared to Q2 2006 Periodand Fiscal 2007 Period compared to Fiscal 2006 Period***

***Admissions***

During the Q2 2007 Period, total admissions revenuesincreased $5.4 million, or 1.2%, to $457.9 million, from$452.5 million for the Q2 2006 Period. Total admissions revenues increased $40.1 million during the Fiscal2007 Period, or 4.7%, to $884.6 million, from $844.5 million for theFiscal 2006 Period.  Our Q2 2007 Periodadmissions revenues were favorably impacted by a 6.9% increase in averageticket prices, somewhat offset by a 5.4% decline in attendance.  Our Fiscal 2007 Period admissions revenueswere also favorably impacted by a 7.3% increase in average ticket prices,partially offset by a 2.4% decrease in attendance.  The increase in the Q2 2007 Period and theFiscal 2007 Period average ticket prices was primarily attributable to periodicpricing reviews conducted by the Company, which includes analysis of variousfactors, including general inflationary trends and local market conditions, andthe mix of film product exhibited during the Q2 2007 Period and the Fiscal 2007Period. The decrease in the Q2 2007 Period and the Fiscal 2007 Periodattendance was primarily attributable to weak attendance from mid-tier films,partially offset by strong attendance from key 2007 film releases, such as *Spider-Man 3, Pirates of the Caribbean: At World’sEnd, Shrek the Third and 300,*andthe carryover success of the holiday film,*Night at the Museum*. Our Q2 2007 Period and Fiscal 2007 Period attendance also benefitedfrom approximately 125 new screens added since the end of the Q2 2006 Periodand the 58 screens acquired from AMC during the third fiscal quarter of 2006,partially offset by the closure of approximately 198 underperforming

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screenssubsequent to the end of the Q2 2006 period. Based on our review of certain industry sources, the increase in ouradmissions revenues was in line with the industry’s results for the Q2 2007Period and the Fiscal 2007 Period as compared to the Q2 2006 Period and Fiscal2006 Period.

***Concessions***

Total concessions revenues increased$12.2 million, or 6.6%, to $197.4 million for the Q2 2007 Period,from $185.2 million for the Q2 2006 Period.  During the Fiscal 2007 Period, totalconcessions revenues increased $21.9 million, or 6.4%, to$365.7 million, from $343.8 million for the Fiscal 2006 Period.  The increase in concessions revenues in theQ2 2007 Period and the Fiscal 2007 Period was due to a 12.7% increase and 9.0%increase, respectively, in average concessions per patron, partially offset bythe aforementioned Q2 2007 Period and Fiscal 2007 Period decreases inattendance.  The growth in averageconcession revenues per patron for the Q2 2007 Period and the Fiscal 2007Period was primarily attributable to price increases, concession-friendly filmsexhibited during the Q2 2007 Period and Fiscal 2007 Period, such as *Pirates of the Caribbean: At World’s End, Spider-Man3*and*Shrek the Third,*and a favorable mix ofconcession products sold during the Q2 2007 Period.

***Other OperatingRevenues***

Total other operating revenues decreased$18.8 million, or 40.1%, to $28.1 million for the Q2 2007 Period,from $46.9 million for the Q2 2006 Period. During the Fiscal 2007 Period, total other operating revenues decreased$23.3 million, or 28.6%, to $58.1 million, from $81.4 millionfor the Fiscal 2006 Period.  Included inother operating revenues are the theatre access fees paid by National CineMedia,offset by the purchase of on-screen advertising time from National CineMediafor on-screen advertising time provided by us to our beverage concessionaire,marketing revenues from our vendor marketing programs and other theatrerevenues. The decrease in other operating revenues in the Q2 2007 Period andFiscal 2007 Period was primarily attributable to a modification of the paymentarrangement with National CineMedia (effective upon consummation of the IPO ofNCM Inc. on February 13, 2007) described in further detail under Note 3—“Investmentin National CineMedia, LLC.”

***Film Rental andAdvertising Costs***

During the Q2 2007 Period, film rental and advertisingcosts as a percentage of admissions revenues increased to 55.1% as compared to54.1% in the Q2 2006 Period.  Film rentaland advertising costs as a percentage of admissions revenues increased to 53.2%during the Fiscal 2007 Period as compared to 52.3% in the Fiscal 2006Period.  The increases in film rental andadvertising costs as a percentage of box office revenues during the Q2 2007Period and the Fiscal 2007 Period were primarily the result of a higherpercentage of box office revenues generated by the top 5 films exhibited duringthe Q2 2007 Period (approximately 49%) as compared to the Q2 2006 Period(approximately 41%).

***Cost of Concessions***

Cost of concessions as a percentage of concessionsrevenues decreased to 14.1% in the Q2 2007 Period as compared to 15.6% in theQ2 2006 Period.  During the Fiscal 2007Period, cost of concessions as a percentage of concessions revenues decreasedto 14.5% as compared to 15.4% in the Fiscal 2006 Period. The decrease in thecost of concessions as a percentage of concession revenues during the Q2 2007Period and the Fiscal 2007 Period was primarily related to increases inconcession prices coupled with the mixof concession products sold during such periods.

***Rent Expense***

During the Q2 2007 Period, rent expense increased$3.5 million, or 4.4%, to $83.3 million in the Q2 2007 Period,from $79.8 million in the Q2 2006 Period. Rent expense increased $6.9 million, or 4.4%, to$164.3 million in the Fiscal 2007 Period, from $157.4 million in theFiscal 2006 Period.  The increase in 

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rentexpense in the Q2 2007 Period and the Fiscal 2007 Period was primarilyattributable to general inflationary increases along with incremental rent fromthe inclusion of 125 new screens added since the end of the Q2 2006 Period andthe 58 screens acquired from AMC during the third fiscal quarter of 2006,partially offset by the closure of approximately 198 underperforming screenssubsequent to the end of the Q2 2006 Period.

***Other OperatingExpenses***

Other operating expenses increased approximately $7.6million or 4.5% to $176.2 million in the Q2 2007 Period, from $168.6 million inthe Q2 2006 Period and increased approximately $13.9 million or 4.3% to $341.1million in the Fiscal 2007 Period, from $327.2 million in the Fiscal 2006Period.  The increase in total otheroperating expenses during the Q2 2007 Period and the Fiscal 2007 Period wasprimarily attributable to an increase in labor and non-rent occupancy costs,partially offset by a decrease in expenses of National CineMedia, due to amodification of the payment arrangement with National CineMedia (effective uponconsummation of the IPO of NCM Inc. on February 13, 2007) described in furtherdetail under Note 3—“Investment in National CineMedia, LLC.” Increases in labor costs were the result of state minimum wage increases,coupled with normal inflationary increases.

***General andAdministrative Expenses***

General and administrative expenses decreased$0.3 million, or 1.8%, to $16.8 million during the Q2 2007 Period,from $17.1 million in the Q2 2006 Period. As a percentage of total revenues, general and administrative expensesremained consistent at 2.5% in the Q2 2007 Period and the Q2 2006Period.  During the Fiscal 2007 Period,general and administrative expenses decreased $0.2 million, or 0.6%, to$32.8 million, from $33.0 million in the Fiscal 2006 Period.  As a percentage of total revenues, generaland administrative expenses decreased to 2.5% in the Fiscal 2007 Periodfrom 2.6% in the Q2 2006 Period.  Thedecrease in general and administrative expenses as a percentage of totalrevenues during the Fiscal 2007 Period as compared to the Fiscal 2006 Periodwas primarily attributable to the overall increase in total revenues during theFiscal 2007 Period.

***Depreciation andAmortization***

For the Q2 2007 Period, depreciation and amortizationdecreased $4.6 million, or 9.1%, to $46.1 million, from $50.7 millionin the Q2 2006 Period.  Depreciation andamortization decreased $8.0 million, or 8.0%, to $92.4 million duringthe Fiscal 2007 Period, from $100.4 million in the Fiscal 2006 Period.  The decrease in depreciation and amortizationexpense during the Q2 2007 Period and the Fiscal 2007 Period was primarily dueto a greater percentage of fully depreciated fixed assets (primarilyNCM-related equipment) during the Q2 2007 Period and the Fiscal 2007 Period ascompared to the Q2 2006 Period and the Fiscal 2006 Period, respectively.

***Income fromOperations***

Income from operations totaled approximately$83.0 million for the Q2 2007 Period, which represents a decrease of$6.0 million, or 6.7%, from $89.0 million in the Q2 2006 Period.  For the Fiscal 2007 Period, income fromoperations totaled approximately $148.0 million, which represents anincrease of $8.3 million, or 5.9%, from $139.7 million in the Fiscal2006 Period. The decrease in income from operations during the Q2 2007 Periodwas primarily attributable to lower other operating revenues and increases incertain operating expense items described in further detail above, partiallyoffest by incremental admissions and concessions revenues and decreases incertain operating expense items such as depreciation and amortization, equityin earnings of joint venture including former employee compensation and loss ondisposal and impairment of operating assets. The increase in income fromoperations during the Fiscal 2007 Period was primarily attributable toincremental admissions and concessions revenues described above, coupled withdecreases in certain operating expense items such as depreciation andamortization, equity in earnings of joint venture including former employeecompensation and loss on disposal and impairment of operating assets, partiallyoffset by decreases in other operating revenues and increases in film andadvertising costs, rent expense, and other operating expenses.

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***Interest Expense,net***

Net interest expense decreased $3.9 million, or13.3%, to $25.5 million in the Q2 2007 Period, from $29.4 million inthe Q2 2006 Period.  During theFiscal 2007 Period, net interest expense decreased $4.0 million, or 6.6%,to $56.5 million, from $60.5 million in the Fiscal 2006Period.  The decrease in net interestexpense during the Q2 2007 Period and the Fiscal 2007 Period as compared to theQ2 2006 Period and the Fiscal 2006 Period was principally due to incrementalinterest income from a higher outstanding cash balance during the Q2 2007Period and the Fiscal 2007 Period resulting from transactions completed inconnection with the IPO of NCM Inc. (see Note 3—“Investment in NationalCineMedia, LLC” for further discussion).

***Income Taxes***

The provision for income taxes of $35.1 million and$11.3 million for the Q2 2007 Period and the Q2 2006 Period, respectively,reflect effective tax rates of approximately 40.0% and 40.5%,respectively.  The provision for incometaxes of $190.7 million and $18.8 million for the Fiscal 2007 Period and theFiscal 2006 Period, respectively, reflect effective tax rates of approximately40.4% and 40.3%, respectively.  Thedecrease in the effective tax rate for the Q2 2007 Period is primarilyattributable to the impact of settlements with state taxing authorities on theeffective tax rate during the quarter ended June 29, 2006.

***Net Income***

During the Q2 2007 Period, net income totaled$52.7 million, which represents an increase of $36.1 million, from$16.6 million in the Q2 2006 Period. Net income totaled $281.8 million during the Fiscal 2007 Period,which represents an increase of $254.0 million, from $27.8 million inthe Fiscal 2006 Period.  The increase innet income for the Q2 2007 Period is primarily due to a $28.3 million gain($17.0 million after related tax effects) resulting from transactions completedin connection with the sale of our equity interest in Fandango, Inc. (seeNote 1—“The Company and Basis of Presentation” for further discussion) andthe impact of a $31.6 million loss ($19.0 million after related tax effects) ondebt extinguishment recorded in the Q2 2006 Period in connection withconversions of approximately $100.0 million in principal amount of theCompany’s Convertible Senior Notes, partially offset by a decrease in operatingincome described in further detail above.  The increase in net income for the Fiscal 2007Period was primarily attributable to an increase in operating income describedabove, an approximate $209.0 million gain, net of related tax effects,****recorded in the Fiscal 2007 Periodresulting from transactions completed in connection with the IPO of NCM Inc.(see Note 3—“Investment in National CineMedia, LLC” for furtherdiscussion), the $17.0 million gain, net of related tax effects, received inconnection with the sale of the Company’s equity interest in Fandango, Inc. andthe impact of a $31.6 million loss ($19.0 million after related tax effects) ondebt extinguishment recorded in the Q2 2006 Period in connection withconversions of approximately $100.0 million in principal amount of theCompany’s Convertible Senior Notes.

***Cash Flows***

The following table summarizes certain cash flow datafor the Fiscal 2007 Period and the Fiscal 2006 Period (in millions):
| ** **                                            | ** ** | **Fiscal 2007 Period** | ** ** | **Fiscal 2006 Period** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Net cash  provided by operating activities            |       | $                                | 643.3      |                             | $          | 135.8 |   |
| Net cash used in  investing activities                |       | (20.2                            | )          | (50.4                            | )          |
| Net cash used in  financing activities                |       | (378.4                           | )          | (100.5                           | )          |
|                                                  |       |                             |       |                             |       |
| Net increase (decrease)  in cash and cash equivalents |       | $                                | 244.7      |                             | $          | (15.1 | ) |

 

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*Fiscal 2007 Period Compared to Fiscal 2006 Period*

Net cash flows generated from operating activitiesincreased by approximately $507.5 million to approximately$643.3 million for the Fiscal 2007 Period from approximately$135.8 million for the Fiscal 2006 Period.  The increase in net cashflows generated from operating activities for the Fiscal 2007 Period wasprimarily attributable to the transactions completed in connection with the IPOof NCM Inc. (see Note 3—“Investment in National CineMedia, LLC” for furtherdiscussion).  The $628.3 million of grossproceeds received in connection with the NCM Inc. IPO transaction resulted inan increase in net income of approximately $209.0 million, a non-cash gain ofapproximately $3.4 million, an increase in deferred revenue ofapproximately $281.0 million (before related amortization of $0.9 million forthe Fiscal 2007 Period), an increase in deferred income tax benefit ofapproximately $43.0 million, an increase in income taxes payable ofapproximately $184.7 million (before tax payments of approximately $92.4 millionfor the Fiscal 2007 Period).  Thesechanges in cash flows from operating activities were partially offset by thetiming of other Fiscal 2007 Period income tax payments and vendor payments, resultingin the $507.5 million net increase in net cash provided by operatingactivities for the Fiscal 2007 Period.

Net cash flows used in investing activities totaledapproximately $20.2 million for the Fiscal 2007 Period compared to cashflows used in investing activities of approximately $50.4 million for theFiscal 2006 Period. Contributing to the decrease in cash flows used ininvesting activities was $28.3 million of proceeds received in connection withthe sale of the Company’s equity interest in Fandango, Inc. during the Fiscal2007 Period, coupled with greater proceeds from the disposition of assetseffected during the Fiscal 2007 Period, partially offset by a $2.4 millionincrease in capital expenditures and a $1.5 million investment in the DCIPjoint venture during the Fiscal 2007 Period.

Net cash flows used in financing activities wereapproximately $378.4 million for the Fiscal 2007 Period compared to cash flowsused in financing activities of approximately $100.5 million for theFiscal 2006 Period. The net increase in cash flows used in financing activitiesduring the Fiscal 2007 Period was primarily attributable to $303.7 million ofincremental dividends paid to shareholders (including an extraordinary cashdividend of $2.00 per share on each outstanding share of its Class A andClass B common stock, including outstanding restricted stock, or approximately$302.0 million in the aggregate) during the Fiscal 2007 Period as compared tothe Fiscal 2006 Period, coupled with a $100.0 million reduction in borrowingsfrom the Regal Cinemas senior credit facility during the Fiscal 2007 Period,partially offset by less net cash used to settle conversions of the Company’sConvertible Senior Notes, greater proceeds from stock option exercises andgreater excess tax benefits from share-based payment arrangements during theFiscal 2007 Period as compared to the Fiscal 2006 Period

**Liquidity and Capital Resources**

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

Our revenues are generally collected in cash throughadmissions and concessions revenues. Our operating expenses are primarilyrelated to film and advertising costs, rent and occupancy, and payroll. Filmcosts are ordinarily paid to distributors within 30 days following receiptof admissions revenues and the cost of the Company’s concessions are generallypaid to vendors approximately 30 days from purchase. Our currentliabilities generally include items that will become due within twelvemonths.  In addition,

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fromtime to time, we use cash from operations and borrowings to fund dividends inexcess of net income and cash flows from operating activities less cash flowsfrom investing and financing activities.  As a result, at any given time,our balance sheet may reflect a working capital deficit.

We fund the cost of capital expenditures throughinternally generated cash flows, cash on hand, proceeds from disposition ofassets and financing activities. Our capital requirements have historicallyarisen principally in connection with acquisitions of theatres, new theatreconstruction, adding new screens to existing theatres, upgrading the Company’stheatre facilities and replacing equipment. We intend to continue to grow ourtheatre circuit through selective expansion and acquisition opportunities. TheCompany has a formal and intensive review procedure for the authorization ofcapital projects, with the most important financial measure of acceptabilityfor a discretionary non-maintenance capital project being whether its projecteddiscounted cash flow return on investment meets or exceeds the Company’sinternal rate of return targets. We currently expect capital expenditures fortheatre development, replacement, expansion, upgrading and replacements to bein the range of approximately $120.0 million to $140.0 million infiscal year 2007, exclusive of acquisitions. Such capital expenditures areexpected to be partially funded through asset dispositions conducted during thenormal course of our business. During the Fiscal 2007 Period, we investedapproximately $57.8 million in capital expenditures.

For a discussion of the series of significantfinancing transactions which have occurred through December 28, 2006,please refer to “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Liquidity and Capital Resources” contained inPart II, Item 7 of our annual report on Form 10-K filed on February26, 2007 with the Commission (File No. 001-31315) for the fiscal year endedDecember 28, 2006.

As described in Note 3—“Investment in NationalCineMedia, LLC,” in connection with the formation of National CineMedia, onMay 11, 2005, RCI adopted and approved a Severance Plan for RCM employeeswho held an unvested option to purchase shares of Regal’s Class A commonstock or shares of Regal’s restricted Class A common stock pursuant to theterms of the Incentive Plan immediately prior to such employee’s termination ofemployment with RCM and commencement of employment with National CineMedia.During the Fiscal 2007 Period, the Company recorded total severance expense ofapproximately $1.7 million, including payments in lieu of dividends,related to the Severance Plan.

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

In connection with the completion of the IPO, RCIamended and restated its ESA with National CineMedia, whereby in exchange forits pro rata share of the IPO proceeds, RCI agreed to a modification ofNational CineMedia’s payment obligation under the existing services agreement.The modification extended the term of the ESA to 30 years, provided NationalCineMedia with a five year right of first refusal beginning one year prior tothe end of the term and changed the basis upon which Regal is paid by NationalCineMedia from a percentage of revenues associated with advertising contractsentered into by National CineMedia to a monthly theatre access fee. The theatreaccess fee is composed of a fixed $0.07 payment per patron which will increaseby 8% every five years starting at the end of fiscal 2011 and a fixed $800payment per digital screen each year, which will increase by 5% annuallystarting at the end of fiscal 2007. Also, with respect to any on-screenadvertising time provided by us to our beverage concessionaire, Regal isrequired to purchase such time from National CineMedia at a negotiated rate. Inaddition, we receive mandatory quarterly distributions of any excess cash fromNational CineMedia. In addition, National CineMedia paid the net proceeds toeach of Regal, AMC and Cinemark in exchange for modifying payment obligationsfor access to their respective theatres, for which Regal received a payment ofapproximately $281.0 million, which represents the estimated fair value of theESA modification payment.  We estimated the fair value of the ESA paymentbased upon a valuation performed by the Company with the assistance of thirdparty specialists.  This amount has been recorded as deferred revenue andwill be amortized to advertising revenue over the 30 year term of theagreement following the units of revenue method.

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At the closing of the IPO, the underwriters exercisedtheir over-allotment option to purchase an additional 4.0 million shares ofcommon stock of NCM Inc. at the initial offering price of $21 per share, lessunderwriting discounts and commissions. In connection with this over-allotmentoption exercise, Regal, AMC and Cinemark each sold to NCM Inc. common units ofNational CineMedia on a pro rata basis at the initial offering price of $21 pershare, less underwriting discounts and expenses. Regal sold approximately 1.6million common units to NCM Inc. for proceeds of approximately $32.2million.  Upon completion of this sale of common units and as of June 28,2007, Regal held approximately 21.2 million common units of National CineMedia,or a 22.6% interest.

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

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

During the quarterended June 28, 2007, the Company sold its equity interest in Fandango, Inc. forproceeds of $28.3 million.  As aresult of this transaction, the Company recognized a gain on the sale ofapproximately $28.3 million ($17.0 million after tax).  In connection with the sale, the Companyagreed to amend its existing contract with Fandango, Inc. in exchange for anamendment fee totaling $5.5 million. This amount has been recorded as deferred revenue and will be amortizedto revenue on a straight-line basis over the six year term of the amendment.

Regal paid two quarterly cash dividends of $0.30 pershare on each outstanding share of the Company’s Class A and Class Bcommon stock, including outstanding restricted stock (see Note 6—“CapitalStock and Share-Based Compensation”), or approximately $91.2 million inthe aggregate, during the Fiscal 2007 Period.  In addition, on March 5,2007, Regal declared an extraordinary cash dividend of $2.00 per share on eachoutstanding share of its Class A and Class B common stock, includingoutstanding restricted stock. Stockholders of record at the close of businesson March 28, 2007 were paid this dividend on April 13, 2007.  Finally, onJuly 26, 2007, the Company declared a cash dividend of $0.30 per share on eachshare of the Company’s Class A and Class B common stock (includingoutstanding restricted stock), payable on September 20, 2007, to stockholdersof record on September 12, 2007.  These dividends have been or will befunded through cash flow from operations and available cash on hand. We, at thediscretion of the board of directors and subject to applicable law, anticipatepaying regular quarterly dividends on our Class A and Class B commonstock for the foreseeable future. The amount, if any, of the dividends to bepaid in the future will depend upon our then available cash, anticipated cashneeds, overall financial condition, loan agreement restrictions, futureprospects for earnings and cash flows, as well as other relevant factors.

As of June 28, 2007, the holders of our ConvertibleSenior Notes had the right, at their option, to convert their ConvertibleSenior Notes, in whole or in part, into shares of our Class A commonstock, subject to certain limitations, at the then existing conversion priceper share. The Convertible Senior Notes allow us to settle any conversion, andwe have the ability and intent 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.

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On October 27, 2006, Regal Cinemas entered intothe Amended Senior Credit Facility with Credit Suisse, Cayman Islands Branch(as successor to CSFB), as Administrative Agent and the other lenders party thereto,which consists of the Term Facility in an aggregate original principal amountof $1,700.0 million and the Revolving Facility in an aggregate principalamount of up to $100.0 million. The Revolving Facility has a separate sublimitof $10.0 million for short-term loans and a sublimit of $30.0 million forletters of credit. The Term Facility will mature on October 27, 2013 andthe Revolving Facility will mature on October 27, 2011.

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

As of June 28, 2007, we had approximately $1,691.5million aggregate principal amount outstanding under the Term Facility, $123.7million aggregate principal amount outstanding under Convertible Senior Notesand $51.5 million aggregate principal amount outstanding under the RegalCinemas 933¤8% Senior SubordinatedNotes. As of June 28, 2007, we had approximately $0.8 million outstanding inletters of credit, leaving approximately $99.2 million available for drawingunder the Revolving Facility.

EBITDA (earnings before interest, taxes, depreciationand amortization) was approximately $159.4 million, or 23.3% of totalrevenues, for the Q2 2007 Period and $108.0 million, or 15.8% of totalrevenues, for the Q2 2006 Period.  Forthe Fiscal 2007 Period, EBITDA was approximately $621.4 million, or 47.5% oftotal revenues as compared to $207.5 million, or 16.3% of total revenues forthe Fiscal 2006 Period.  The increase inEBITDA for the Q2 2007 Period is primarily due to a $28.3 million gain ($17.0million after related tax effects) resulting from transactions completed inconnection with the sale of our equity interest in Fandango, Inc. (seeNote 1—“The Company and Basis of Presentation” for further discussion) andthe impact of a $31.6 million loss ($19.0 million after related tax effects) ondebt extinguishment recorded in the Q2 2006 Period in connection withconversions of approximately $100.0 million in principal amount of theCompany’s Convertible Senior Notes, partially offset by a decrease in operatingincome as described in further detail above.  The increase in EBITDA forthe Fiscal 2007 Period was primarily attributable to an increase in operatingincome described above, an approximate $209.0 million gain, net of related taxeffects,****recorded in the Fiscal2007 Period resulting from transactions completed in connection with the IPO ofNCM Inc. (see Note 3—“Investment in National CineMedia, LLC” for furtherdiscussion), the $17.0 million gain, net of related tax effects, received inconnection with the sale of the Company’s equity interest in Fandango, Inc. andthe impact of a $31.6 million loss ($19.0 million after related tax effects) ondebt extinguishment recorded in the Q2 2006 Period in connection withconversions of approximately $100.0 million in principal amount of theCompany’s Convertible Senior Notes.  TheCompany uses EBITDA as a supplemental liquidity measure because we find ituseful to understand and evaluate our capacity, excluding the impact ofinterest, taxes, and non-cash depreciation and amortization charges, forservicing our debt, paying dividends and otherwise meeting our cash needs,prior to our consideration of the impacts of other potential sources and usesof cash, such as working capital items. We believe that EBITDA is useful toinvestors for these purposes as well.  EBITDA should not be considered analternative to, or more meaningful than, net cash provided by operatingactivities, as determined in accordance with accounting principles generallyaccepted in the United States of America (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

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associatedwith changes in other balance sheet items (such as long-term loss accruals anddeferred items).  Because EBITDA excludes depreciation and amortization,EBITDA does not reflect any cash requirements for the replacement of the assetsbeing depreciated and amortized, which assets will often have to be replaced inthe future. Further, EBITDA, because it also does not reflect the impact ofdebt service, cash dividends, capital expenditures and other cash commitmentsfrom time to time as described in more detail elsewhere in this quarterlyreport on Form 10-Q, does not represent how much discretionary cashwe have available for other purposes.  Nonetheless, EBITDA is a keymeasure expected by and useful to our fixed income investors, rating agenciesand the banking community all of whom believe, and we concur, that thesemeasures are critical to the capital markets’ analysis of our ability toservice debt, fund capital expenditures, pay dividends and otherwise meet cashneeds, respectively. We also evaluate EBITDA because it is clear that movementsin these non-GAAP measures impact our ability to attract financing and paydividends.  EBITDA, as calculated, may not be comparable to similarlytitled measures reported by other companies. A reconciliation of EBITDA to netcash provided by (used in) operating activities is calculated as follows (inmillions): 
| ** **                                           | ** ** | **Q2 2007 Period** | ** ** | **Q2 2006 Period** | ** ** | **Fiscal 2007  Period** | ** ** | **Fiscal 2006  Period** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| EBITDA                                               |       | $                            | 159.4      |                         | $          | 108.0                        |       | $                            | 621.4      |   | $ | 207.5 |   |
| Interest  expense, net                               |       | (25.5                        | )          | (29.4                        | )          | (56.5                        | )          | (60.5                        | )          |
| Provision for  income taxes                          |       | (35.1                        | )          | (11.3                        | )          | (190.7                       | )          | (18.8                        | )          |
| Deferred income  taxes                               |       | (2.0                         | )          | (3.7                         | )          | (46.8                        | )          | (4.8                         | )          |
| Changes in  operating assets and liabilities         |       | (136.6                       | )          | 8.8                          |       | 332.9                        |       | (47.2                        | )          |
| Loss on debt  extinguishment                         |       | —                       |       | 31.6                         |       | —                       |       | 32.5                         |       |
| Gain on sale of  Fandango interest                   |       | (28.3                        | )          | —                       |       | (28.3                        | )          | —                       |       |
| Other items, net                                     |       | 1.4                          |       | 10.9                         |       | 11.3                         |       | 27.1                         |       |
|                                                 |       |                         |       |                         |       |                         |       |                         |       |
| Net cash provided by  (used in) operating activities |       | $                            | (66.7      | )                            | $          | 114.9                        |       | $                            | 643.3      |   | $ | 135.8 |   |

 

**Contractual Cash Obligations and Commitments**

For a summary of our contractual cash obligations andcommitments as of December 28, 2006, please refer to Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Contractual Cash Obligations and Commitments” contained in ourannual report on Form 10-K for the fiscal year ended December 28,2006. As of June 28, 2007, there were no material changes outside the ordinarycourse of our business in our contractual cash obligations and commitments. Webelieve that the amount of cash and cash equivalents on hand, cash flowexpected from operations and availability under our Revolving Facility will beadequate for the Company to execute its business strategy and meet anticipatedrequirements for lease obligations, capital expenditures, working capital anddebt service for the next twelve months.

**Critical Accounting Estimates**

For a discussion of accounting policies that weconsider critical to our business operations and the understanding of ourresults of operations and affect the more significant judgments and estimatesused in the preparation of our unaudited condensed consolidated financialstatements, please refer to Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Critical Accounting Estimates”contained in our annual report on Form 10-K for the fiscal year endedDecember 28, 2006 and incorporated by reference herein. As of June 28,2007, there were no significant changes in our critical accounting policies orestimation procedures.

**Recent Accounting Pronouncements**

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

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**Seasonality**

The Company’s revenues are usually seasonal,coinciding with the timing of releases of motion pictures by the majordistributors. Generally, studios release the most marketable motion picturesduring the summer and the holiday seasons. The unexpected emergence of a “hit”film during other periods can alter the traditional pattern. The timing ofmovie releases can have a significant effect on the Company’s results ofoperations, and the results of one quarter are not necessarily indicative ofthe results for the next or any other quarter. The seasonality of motionpicture exhibition, however, has become less pronounced as studios arereleasing motion pictures somewhat more evenly throughout the year.

**Item 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

The Company’s market risk is confined to interest rateexposure of its and its wholly owned subsidiaries’ debt obligations that bearinterest based on floating rates. The Amended Senior Credit Facility providesvariable rate interest that could be adversely affected by an increase ininterest rates. Borrowings under the prior term facility bore and the TermFacility bear interest, at Regal Cinemas’ option, at either an AdjustedEurodollar Rate or the base rate plus, in each case, an applicable margin.

During the years ended December 29, 2005 and December30, 2004, Regal Cinemas entered into five distinct hedging relationships viafive separate interest rate swap agreements with final maturity terms rangingfrom three to five years for the purpose of hedging an aggregate ofapproximately $1,100.0 million of its variable rate debt obligations.Under the terms of the interest rate swap agreements, Regal Cinemas paysinterest at various fixed rates ranging from 3.49%—4.337% and receives interestat a variable rate based on the 3-month LIBOR. On June 30, 2007, one of our interest rate swaps designated to hedgeapproximately $200.0 million of variable rate obligations matured.  For a further description of the swapagreements, see Note 5 to the consolidated financial statements includedin Part II, Item 8 of our annual report on Form 10-K for thefiscal year ended December 28, 2006, which is incorporated herein byreference.

As of June 28, 2007 and December 28, 2006,borrowings of $1,691.5 million and $1,700.0 million, respectivelywere outstanding under the Term Facility and the prior term facility,respectively, at an effective interest rate of 6.13% (as of June 28, 2007) and6.23% (as of December 28, 2006), after the impact of the interest rate swaps istaken into account. A hypothetical change of 10% in the Company’s effectiveinterest rate under the Term Facility as of June 28, 2007, would increase ordecrease interest expense by $2.6 million for the quarter ended June 28,2007.

**Item 4. CONTROLS AND PROCEDURES**

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed by us in thereports that we file or submit to the Commission under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), is recorded, processed,summarized and reported within the time periods specified by the Commission’srules and forms, and that information is accumulated and communicated to ourmanagement, including our principal executive, principal financial andprincipal accounting officers (whom we refer to in this periodic report as ourCertifying Officers), as appropriate to allow timely decisions regardingrequired disclosure. Our management evaluated, with the participation of ourCertifying Officers, the effectiveness of our disclosure controls andprocedures as of June 28, 2007, pursuant to Rule 13a-15(b) under theExchange Act. Based upon that evaluation, our Certifying Officers concludedthat, as of June 28, 2007, our disclosure controls and procedures wereeffective.

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

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**PART II—OTHER INFORMATION**

**Item 1. LEGAL PROCEEDINGS**

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

**Item 1A. RISK FACTORS**

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

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

Our 2007 annual meeting of stockholders was held onMay 9, 2007 in Knoxville, Tennessee. The matters submitted for a vote atthe meeting and the related election results were are as follows:

1.  Election of three Class IIdirectors to serve for three-year terms on our board of directors:
|                      | ** ** | **For**     | ** ** | **Withheld** | ** ** |
|----------------------|------------|-------------|------------|--------------|------------|
| ** **           | ** ** | ** **  | ** ** | ** **   | ** ** |
| Thomas D. Bell,  Jr. |       | 356,591,291 |       | 3,229,067    |       |
| David H. Keyte       |       | 359,777,428 |       | 42,930       |       |
| Lee M. Thomas        |       | 359,745,680 |       | 74,678       |       |

 

Those Directors whose terms of office continued after the meeting wereas follows: Michael L. Campbell, Stephen A. Kaplan, Jack Tyrrell,Nestor R. Weigand, Jr. and Alex Yemenidjian.

2.  Ratification of the auditcommittees’ selection of KPMG LLP as our independent registered publicaccounting firm for the fiscal year ending December 27, 2007: 

| For         | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-Vote** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **           | ** ** |
| 359,678,786 |       | 123,366     |       | 18,206      |       | 0                    |       |

 

**Item 6. EXHIBITS**
| Exhibit No. | ** ** | **Exhibit Description**                                                 |
|------------------|------------|------------------------------------------------------------------------------|
| 31.1             |       | Rule 13a-14(a) Certification of Chief  Executive Officer of Regal. |
|             |       |                                                                         |
| 31.2             |       | Rule 13a-14(a) Certification of Chief  Financial Officer of Regal. |
|             |       |                                                                         |
| 32               |       | Section 1350 Certifications.                                            |

 

 

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                      | ** ** | **REGAL ENTERTAINMENT GROUP**                                                                        |
|----------------------|------------|------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                 |
| Date: August 7, 2007 | By:        | /s/  MICHAEL L. CAMPBELL                                                                   |   |   |
|                 |       | Michael L. Campbell*Chief Executive Officer (Principal  Executive Officer)*                          |
|                 |       |                                                                                                 |
| Date: August 7, 2007 | By:        | /s/  AMY E. MILES                                                                          |   |   |
|                 |       | Amy E. Miles*Executive Vice President and Chief   Financial Officer (Principal Financial  Officer)*  |
|                 |       |                                                                                                 |
| Date: August 7, 2007 | By:        | /s/  DAVID H. OWNBY                                                                        |   |   |
|                 |       | David H. Ownby*Senior Vice President and Chief   Accounting Officer (Principal Accounting  Officer)* |

 

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**REGAL ENTERTAINMENT GROUP**

**Exhibit Index**
| Exhibit No. | ** ** | **Exhibit Description**                                                 |
|------------------|------------|------------------------------------------------------------------------------|
| 31.1             |       | Rule 13a-14(a) Certification of Chief  Executive Officer of Regal. |
|             |       |                                                                         |
| 31.2             |       | Rule 13a-14(a) Certification of Chief  Financial Officer of Regal. |
|             |       |                                                                         |
| 32               |       | Section 1350 Certifications.                                            |

 

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