<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  ------------

                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998
                                                Commission file number 333-52943


                               REGAL CINEMAS, INC.
             (Exact name of registrant as specified in its charter)


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                Tennessee                                                    62-1412720
      (State or other jurisdiction                             (I.R.S. employer identification number)
    of incorporation or organization)

       7132 Commercial Park Drive
          Knoxville, Tennessee                                                  37918
(Address of principal executive offices)                                     (Zip Code)
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         Registrant's telephone number, including area code:  (423) 922-1123

         Securities registered pursuant to Section 12(b) of the Act:   None

         Securities registered pursuant to Section 12(g) of the Act:   None


         Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes  /X/     No  / /

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Shares of common stock, no par value per share, outstanding on March 31, 1999,
were 216,672,105.
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                               REGAL CINEMAS, INC.
                             FORM 10-K ANNUAL REPORT
                                TABLE OF CONTENTS

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PART I   .........................................................................................................1
         Item 1.  Business........................................................................................1
              The Company.........................................................................................1
              Recapitalization and Financing......................................................................2
              Business Strategy...................................................................................3
              Industry Overview...................................................................................5
              Theatre Operations..................................................................................6
              Seasonality.........................................................................................8
              Film Licensing......................................................................................8
              Complementary Concepts..............................................................................9
              Competition........................................................................................10
              Management Information Systems.....................................................................10
              Employees..........................................................................................11
              Regulation.........................................................................................11
              Risk Factors.......................................................................................11
         Item 2.  Properties.....................................................................................16
         Item 3.  Legal Proceedings..............................................................................16
         Item 4.  Submission of Matters to a Vote of Security-Holders............................................16

PART II  ........................................................................................................17
         Item 5.  Market for the Registrant's Common Equity and Related Shareholder Matters......................17
         Item 6.  Selected Financial Data........................................................................18
         Item 7.  Management's Discussion and Analysis of Financial Condition and Results
                  of Operations..................................................................................20
              Overview...........................................................................................20
              Background of Regal................................................................................20
              Results of Operations..............................................................................20
              Loss on Impairment of Assets.......................................................................21
              Fiscal Years Ended December 31, 1998 and January 1, 1998...........................................22
              Fiscal Years Ended January 1, 1998 and January 2, 1997.............................................22
              Liquidity and Capital Resources....................................................................23
              Inflation; Economic Downturn.......................................................................26
              Year 2000-State of Readiness.......................................................................26
              New Accounting Pronouncements......................................................................27
         Item 7A.  Quantitative and Qualitative Disclosures About Market Risk....................................29
         Item 8.  Financial Statements and Supplementary Data....................................................30
         Item 9.  Changes in and Disagreements with Accountants on Accounting and
                  Financial Disclosure...........................................................................53

PART III ........................................................................................................54
         Item 10.     Directors and Executive Officers of the Registrant.........................................54
         Item 11.     Executive Compensation.....................................................................57
         Item 12.     Security Ownership of Certain Beneficial Owners and Management.............................61
         Item 13.     Certain Relationships and Related Transactions.............................................62

PART IV  ........................................................................................................64
         Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K............................64


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SIGNATURES.......................................................................................................66

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT ...............................................................................67

INDEX TO EXHIBITS................................................................................................68



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                               REGAL CINEMAS, INC.

                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

         Regal Cinemas, Inc. ("Regal" or the "Company") is the largest motion
picture exhibitor in the United States based upon the number of screens in
operation. At December 31, 1998, the Company operated 403 theatres, with an
aggregate of 3,573 screens in 30 states. The Company operates primarily
multiplex theatres and has an average of 8.9 screens per location, which
management believes is among the highest in the industry and which compares
favorably to an average of approximately 7.4 screens per location for the five
largest North American motion picture exhibitors at May 1, 1998. Since its
inception in November 1989, the Company has achieved substantial growth in
revenues and in net income before interest expense, income taxes, depreciation
and amortization, other income or expense, extraordinary items and non-recurring
charges ("EBITDA"). As a result of the Company's focus on enhancing revenues,
operating efficiently and strictly controlling costs, the Company has increased
its EBITDA margins, achieving what management believes are among the highest
EBITDA margins in the motion picture exhibition industry. For the five year
period ended December 31, 1998, the Company had compound annual growth rates in
revenues and EBITDA of 27.0% and 37.4% respectively, and the Company's EBITDA
margins increased from 15.4% to 22.9%.

         The Company develops, acquires and operates multiplex theatres
primarily in mid-sized metropolitan markets and suburban growth areas of larger
metropolitan markets, predominantly in the eastern and northwestern United
States. The Company seeks to locate theatres in markets that it believes are
underscreened or served by older theatre facilities. The Company also seeks to
locate each theatre where it will be the sole or leading exhibitor within a
particular geographic film licensing zone. Management believes that at December
31, 1998, approximately 74% of the Company's screens were located in film
licensing zones in which the Company was the sole exhibitor.

         From its inception through December 31, 1998, the Company has grown by
acquiring a net of 314 theatres with 2,326 screens, constructing 89 theatres
with 1,158 screens and adding 89 screens to existing theatres. This strategy has
served to establish and enhance the Company's presence in selected geographic
markets. The Company anticipates that its future growth will result largely from
the development of new theatres, the addition of new screens to existing
theatres and strategic acquisitions of other theatre circuits. At December 31,
1998, the Company had 42 new theatres with 647 screens under construction and 51
new screens under construction at eight existing theatres. In addition, the
Company had entered into leases in connection with its plans to develop an
additional 52 theatres with 819 screens. The Company has historically achieved
substantial returns on invested capital for newly built theatres.

         On August 26, 1998, the Company acquired Act III Cinemas, Inc. ("Act
III"), then the ninth largest motion picture exhibitor in the United States
based on number of screens in operation (the "Act III Merger"). At the time of
the Act III Merger, Act III operated 130 theatres, with an aggregate of 835
screens, strategically located in concentrated areas throughout the Pacific
Northwest, Texas and Nevada. The Company has acquired ten other theatre circuits
during the last five years, including Cobb Theatres, Georgia State Theatres and
Litchfield Theatres. These acquisitions have enabled the Company to become a
leading operator in certain of its markets and to improve its market
concentration in the eastern and northwestern United States. Through the
integration of these acquisitions, the Company has achieved (or, in the case of
the recently completed Act III Merger, is beginning to realize) economies of
scale by consolidating purchasing, operating and other administrative functions.
The Company continues to consider strategic acquisitions of complementary
theatres or theatre companies. In addition, the Company may enter into joint
ventures, which could serve as a platform for both domestic and international
expansion.
<PAGE>   5
RECAPITALIZATION AND FINANCING

         On May 27, 1998, an affiliate of Kohlberg Kravis Roberts & Co. L.P.
("KKR") and an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks
Muse") merged with and into the Company (the "Regal Merger"), with the Company
continuing as the surviving corporation. The consummation of the Regal Merger
resulted in a recapitalization (the "Recapitalization") of the Company. In the
Recapitalization, existing holders of the Company's common stock (the "Common
Stock") received cash for their shares of Common Stock, and KKR, Hicks Muse, DLJ
Merchant Banking Partners II, L.P. and affiliated funds ("DLJ") and certain
members of the Company's management acquired the Company. In addition, in
connection with the Recapitalization, the Company canceled options and
repurchased warrants held by certain directors, management and employees of the
Company (the "Option/Warrant Redemption"). The aggregate purchase price paid to
effect the Regal Merger and the Option/Warrant Redemption was approximately $1.2
billion.

         The Regal Merger was financed by an offering (the "Original Note
Offering") of $400.0 million aggregate principal amount of 9 1/2% Senior
Subordinated Notes due 2008 (the "Original Notes"), initial borrowings of $375.0
million under the Company's current senior credit facility (as amended, the
"Senior Credit Facilities") and $776.9 million in proceeds from the investment
by KKR, Hicks Muse, DLJ and management in the Company (the "Equity Investment").
The proceeds of the Original Note Offering, the initial borrowing under the
Senior Credit Facilities and the Equity Investment (collectively, the
"Financing") were used: (i) to fund the cash payments required to effect the
Regal Merger and the Option/Warrant Redemption; (ii) to repay and retire the
Company's then existing senior credit facilities; (iii) to repurchase all of the
Company's then existing senior subordinated notes; and (iv) to pay related fees
and expenses. The Financing, the Regal Merger, the Recapitalization and the
transactions contemplated thereby, including but not limited to, the application
of the proceeds of the Financing, are referred to herein as the "Transactions."

         The Company's Senior Credit Facilities provide for borrowings of up to
$1,012.5 million in the aggregate, consisting of $500.0 million under a
revolving credit facility (the "Revolving Credit Facility") and $512.5 million,
in the aggregate, under three separate term loan facilities. As of December 31,
1998, the Company had approximately $493.5 million available for borrowing under
the Senior Credit Facilities.

         On August 26, 1998, in connection with the Act III Merger, the Company
amended its Senior Credit Facilities and borrowed $383.3 million thereunder to
repay Act III's then existing bank borrowings and two senior subordinated
promissory notes, each in the aggregate principal amount of $75.0 million, which
were owned by KKR and Hicks Muse. The repayment of Act III's bank borrowings and
promissory notes, together with the Act III Merger, are referred to herein as
the "Act III Combination."

         On November 10, 1998, the Company issued an additional $200.0 million
aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2008 (the
"Tack-On Notes") under the same indenture governing the Original Notes. The
proceeds of the offering of the Tack-On Notes (the "Tack-On Offering") were used
to repay and retire portions of the Senior Credit Facilities. The Original Notes
and the Tack-On Notes are collectively referred to herein as the "Regal Notes."

         On December 16, 1998, the Company issued $200.0 million aggregate
principal amount of 8 7/8% Senior Subordinated Debentures due 2010 (the "Regal
Debentures"). The proceeds of the offering of the Regal Debentures (the
"Debenture Offering") were used to repay all of the then outstanding
indebtedness under the Revolving Credit Facility and the excess was used for
working capital purposes.

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BUSINESS STRATEGY

Operating Strategy

         Management believes that the following are the key elements of the
Company's operating strategy:

         Multiplex Theatres. Management believes that the Company's multiplex
theatres promote increased attendance and maximize operating efficiencies
through reduced labor costs and improved utilization of theatre capacity. The
Company's multiplex theatres enable it to offer a diverse selection of films,
stagger movie starting times, increase management's flexibility in determining
the number of weeks that a film will run and the size of the auditorium in which
it is shown and more efficiently serve patrons from common concessions and other
support facilities. The Company further believes that the development of
multiplex theatres allows it to achieve an optimal relationship between the
number of screens (generally 14 to 18) and the size of the auditoriums (100 to
500 seats). The Company's multiplex theatres are designed to increase the
profitability of the theatres by maximizing the revenue per square foot
generated by the facility and reducing the cost per square foot of constructing
and operating the theatres.

         Cost Control. The Company's cost control programs have resulted in an
increase in its EBITDA margins, which management believes are among the highest
in the motion picture exhibition industry. Management's focus on cost control
extends from a theatre's initial development to its daily operation. Management
believes that it is able to reduce construction and operating costs by designing
prototype theatres adaptable to a variety of locations and by actively
supervising all aspects of construction. In addition, through the use of
detailed management reports, the Company closely monitors labor scheduling,
concession yields and other significant operating expenses. A significant
component of theatre management's compensation is based on controlling operating
expenses at the theatre level.

         Revenue Enhancements. The Company strives to enhance revenue growth
through: (i) the addition of specialty cafes within certain theatre lobbies
serving non-traditional concessions; (ii) the sale of screen slide and rolling
stock advertising time prior to scheduled movies; (iii) the marketing and
advertising of certain theatres in its circuit; (iv) the addition of
state-of-the-art video arcades; and (v) the rental of theatres to organizations
during non-peak hours.

         Patron Satisfaction/Quality Control. The Company emphasizes patron
satisfaction by providing convenient locations, comfortable seating, spacious
neon-enhanced lobby and concession areas and a wide variety of film selections.
The Company's theatre complexes feature clean, modern auditoriums with high
quality projection and digital stereo surround-sound systems. As of December 31,
1998, approximately 83% of the Company's theatres were equipped with digital
surround-sound systems. The Company is adding stadium seating to certain of its
existing theatres and expects that all of its newly constructed theatres will
feature stadium seating. The Company believes that all of these features serve
to enhance its patrons' movie-going experience and help build patron loyalty. In
addition, the Company promotes patron loyalty through specialized marketing
programs for its theatres and feature films. To maintain quality and consistency
within the Company's theatres, the Company conducts regular inspections of each
theatre and operates a "mystery shopper" program.

         Integration of Acquisitions. The Company has acquired 11 theatre
circuits during the last five years. Management believes that acquisitions
provide the opportunity for the Company to increase revenue growth while
realizing operating efficiencies through the integration of operations. In this
regard, the Company believes it has achieved (or, in the case of the recently
completed Act III Merger, believes it will achieve) cost savings through the
consolidation of its purchasing function, the centralization of certain other
operating

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functions and the uniform application of the most successful cost control
strategies of the Company and its acquisition targets.

         Centralized Corporate Decision Making/Decentralized Operations. The
Company centralizes many of its functions through its corporate office,
including film licensing, concessions purchasing and new theatre construction
and design. The Company also devotes significant resources to training its
theatre managers. These managers are responsible for most aspects of a theatre's
day-to-day operations and implement cost controls at the theatre level,
including the close monitoring of payroll, concession and advertising expenses.

         Marketing. The Company actively markets its theatres through grand
opening promotions, including "VIP" preopening parties, newspaper and radio
advertising, television commercials in certain markets and promotional
activities, such as live music, spotlights and skydivers, which frequently
generate media coverage. The Company also utilizes special marketing programs
for specific films and concession items. The Company seeks to develop patron
loyalty through a number of marketing programs such as a free summer children's
film series, cross-promotion ticket redemptions and promotions within local
communities.

         Performance-Based Compensation Packages. The Company maintains an
incentive program for its corporate personnel, district managers and theatre
managers that links employees' compensation to profitability. The Company
believes that its incentive program, which consists of cash bonuses, purchased
stock and stock options, aligns the employees' interests with those of the
Company's shareholders.

Growth Strategy

         Management believes that the following are the key elements of the
Company's growth strategy:

         Develop New Multiplex Theatres in Existing and Target Markets. The
Company develops multiplex theatres with generally 14 to 18 screens, in its
existing markets, in other mid-sized metropolitan markets and in suburban growth
areas of larger metropolitan markets in the United States. Management seeks to
locate its theatres in areas that are underscreened or that are served by older
theatre facilities. The Company seeks to identify new geographical markets that
present opportunities for expansion and growth and, when identified, targets
these geographical markets for future development. At December 31, 1998, the
Company had 42 new theatres with 647 screens under construction. In addition,
the Company has entered into leases in connection with its plans to develop an
additional 52 theatres with 819 screens.

         Add New Screens and Upgrade Existing Theatres. To enhance profitability
and to maintain competitiveness at existing theatres, the Company continues to
add screens and upgrade its existing theatres, including by adding stadium
seating to certain existing theatres. The Company believes that by adding
screens and upgrading its facilities it can leverage the favorable location of
certain of its theatres and thereby improve its operating margins at those
theatres. At December 31, 1998, the Company had 51 new screens under
construction at eight existing theatre facilities and anticipates that it will
add a total of 90 to 100 screens to certain of its existing theatres by the end
of 1999. The addition of screens to existing theatres is designed not to disrupt
operations at the theatres.

         Acquire Theatres. While management believes that a significant portion
of its future growth will come through the development of new theatres, the
Company will continue to consider strategic acquisitions of complementary
theatres or theatre companies. In addition, the Company may enter into joint
ventures, which could serve as a platform for both domestic and international
expansion. On August 26, 1998, the Company acquired Act III, then the ninth
largest motion picture exhibitor in the United States based on number of screens
in operation. The Company currently has no letters of intent or other written
agreements for any specific acquisitions or joint ventures.

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INDUSTRY OVERVIEW

         The domestic motion picture exhibition industry is currently comprised
of approximately 402 exhibitors, 145 of which operate ten or more total screens.
Based on the May 1, 1998 listing of exhibitors in the National Association of
Theatre Owners 1998-99 Encyclopedia of Exhibition, the five largest exhibitors
(based on the number of screens) operated approximately 36% of the total screens
in operation, with no one exhibitor operating more than 10% of the total
screens. From 1987 through 1997, the number of screens in operation in the
United States increased from approximately 23,000 to approximately 32,000, and
admissions revenues increased from approximately $4.3 billion to approximately
$6.4 billion. The motion picture exhibition industry continues to grow despite
the emergence of competing film distribution channels. Since 1991, the industry
has experienced significant growth with attendance increasing at a 3.3% compound
annual rate. This growth is principally attributed to an increase in the supply
of first-run, big budget films, increased investment in advertising and
promotion by studios, the investment by leading exhibitors in appealing, modern
multiplex theatres to replace aging locations and the moderate price of movies
relative to other out-of-home entertainment options.

         In an effort to realize greater operating efficiencies, operators of
multi-theatre circuits have emphasized the development of larger multiplex
complexes. Typically, multiplexes have six or more screens per theatre, although
in some instances multiplexes may have as many as 30 screens in a single
theatre. The multi-screen format provides numerous benefits for theatre
operators, including allowing facilities (concession stands and restrooms) and
operating costs (lease rentals, utilities and personnel) to be spread over a
larger base of screens and patrons. Multiplexes have varying seating capacities
(typically from 100 to 500 seats) that allow for multiple show times of the same
film and a variety of films with differing audience appeal to be shown, and
provide the flexibility to shift films to larger or smaller auditoriums
depending on their popularity. To limit crowd congestion and maximize the
efficiency of floor and concession staff, the starting times of films at
multiplexes are staggered. The trend of developing large multiplex theatres in
the theatre exhibition industry favors larger, better capitalized companies,
creating an environment for new construction and consolidation. Many smaller
theatre owners who operate older cinemas without state-of-the-art stadium
seating and projection and sound equipment may not have the capital required to
maintain or upgrade their circuits. The growth of the number of screens, strong
domestic consumer demand and growing foreign theatrical and domestic and foreign
ancillary revenue opportunities have led to an increase in the volume of major
film releases. The greater number of screens has allowed films to be produced
for and marketed to specific audience segments (e.g., horror films for
teenagers) without using capacity required for mainstream product.

         The greater number of screens has also prompted distributors to
increase promotion of new films. Not only are there more films in the market at
any given time, but the multiplex format allows for much larger simultaneous
national theatrical release. In prior years, a studio might have released 1,000
prints of a major film, initially releasing the film only in major markets, and
gradually releasing it in smaller cities and towns nationwide. Today, studios
might release over 4,000 prints of a major film and can open it nationally in
one weekend. These national openings have made up-front promotion of films
critical to attract audiences and stimulate word-of-mouth advertising.

         Motion pictures are generally made available through various
distribution methods at various dates after the theatrical release date. The
release dates of motion pictures in these other "distribution windows" begin
four to six months after the theatrical release date with video rentals,
followed generally by off-air or cable television programming including
pay-per-view services, pay television, other basic cable and broadcast network
syndicated programming. These distribution windows have given producers the
ability to generate a greater portion of a film's revenues through channels
other than theatrical release. This increased revenue potential after a film's
initial domestic release has enabled major studios and certain

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independent producers to increase film production and theatrical advertising.
The additional non-theatrical revenue has also permitted producers to incur
higher individual film production and marketing costs. The total cost of
producing and distributing a picture averaged approximately $52.7 million in
1998 compared with approximately $17.5 million in 1986, while the average cost
to advertise and promote a picture averaged approximately $22.1 million in 1997
as compared with $5.4 million in 1986. These higher costs have further enhanced
the importance of a large theatrical release. Distributors strive for a
successful opening run at the theatre to establish a film and substantiate the
film's revenue potential both internationally and through other distribution
windows. The value of home video and pay cable distribution agreements
frequently depends on the success of a film's theatrical release. Furthermore,
the studios' revenue-sharing percentage and ability to control who views the
product within each of the distribution windows generally declines as one moves
farther from the theatrical release window. As theatrical distribution remains
the cornerstone of a film's financial success, it is the primary distribution
window for the public's evaluation of films and motion picture promotion.

         Management expects that the overall supply of films will continue to
increase, although there can be no assurance that any such increase will occur.
There has also been an increase in the number of major studios and reissues of
films as well as an increased popularity of films made by independent producers.
From January 1994 through December 1998, the number of large budget films and
the level of marketing support provided by the production companies has
increased, as evidenced by the increase in average production costs and average
advertising costs per film of approximately 53.6% and 59.3%, respectively.

THEATRE OPERATIONS

         The Company is the largest motion picture exhibitor in the United
States based upon the number of screens in operation. The Company develops,
acquires and operates primarily multiplex theatres in mid-size metropolitan
markets and suburban growth areas of larger metropolitan markets predominately
in the eastern and northwestern United States.

         Multiplex theatres enable the Company to offer a wide selection of
films attractive to a diverse group of patrons residing within the drawing area
of a particular theatre complex. Varied auditorium seating capacities within the
same theatre enable the Company to exhibit films on a more cost effective basis
for a longer period of time by shifting films to smaller auditoriums to meet
changing attendance levels. In addition, operating efficiencies are realized
through the economies of having common box office, concession, projection, lobby
and rest room facilities, which enable the Company to spread certain costs, such
as payroll, advertising and rent, over a higher revenue base. Staggered movie
starting times also reduce staffing requirements and lobby congestion and
contribute to more desirable parking and traffic flow patterns.

         The Company has designed prototype theatres, adaptable to a variety of
locations, which management believes result in construction and operating cost
savings. The Company's multiplex theatre complexes, which typically contain
auditoriums ranging from 100 to 500 seats each, feature wall-to-wall screens,
digital stereo surround-sound, multi-station concessions, computerized ticketing
systems, plush stadium seating with cup holders and retractable arm rests,
neon-enhanced interiors and exteriors and video game areas adjacent to the
theatre lobby.

         The Company's real estate department includes leasing and site
selection, construction supervision and property management. By utilizing a
network of contingent real estate brokers, the Company is able to service a wide
geographic region without incurring incremental staffing costs. The Company also
closely monitors the construction of its theatres to ensure that they will open
on time and remain on budget. The

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property management department ensures that ongoing occupancy costs are reviewed
for accuracy and compliance with the terms of the lease.

         In addition to leasing and site selection, the Company's central
corporate office coordinates film buying, concession purchasing, advertising and
financial and accounting activities.

         The Company's theatre operations are under the supervision of its Chief
Operating Officer and are divided into four geographic divisions, each of which
is headed by a Vice President supervising several district theatre supervisors.
The district theatre supervisors are responsible for implementing Company
operating policies and supervising the managers of the individual theatres, who
are responsible for most of the day-to-day operations of the Company's theatres.
The Company seeks theatre managers with experience in the motion picture
exhibition industry and requires all new managers to complete a training program
at designated training theatres. The program is designed to encompass all phases
of theatre operations, including the Company's philosophy, management strategy,
policies, procedures and operating standards.

         Management closely monitors the Company's operations and cash flow
through daily reports generated from computerized box office terminals located
in each theatre. These reports permit the Company to maintain an accurate and
immediate count of admissions by film title and show times and provide
management with the information necessary to effectively and efficiently manage
the Company's theatre operations. Additionally, daily payroll data is input at
in-theatre terminals which allows the regular monitoring of payroll expenses. In
addition, the Company has a quality assurance program to maintain clean,
comfortable and modern facilities. Management believes that operating a theatre
circuit consisting primarily of modern multiplex theatres also enhances the
Company's ability to license commercially successful films from distributors. To
maintain quality and consistency within the Company's theatre circuit, the
district managers regularly inspect each theatre and the Company operates a
"mystery shopper" program, which involves unannounced visits by unidentified
customers who report on the quality of service, film presentation and
cleanliness at individual theatres. The Company has an incentive compensation
program for theatre level management which rewards managers for controlling
theatre level operating expenses while complying with the Company's operating
standards.

         In addition to revenues from box office admissions, the Company
receives revenues from concession sales and video games located adjacent to the
theatre lobby. Concession sales constituted 28.6% of total revenues for fiscal
1998. The Company emphasizes prominent and appealing concession stations
designed for rapid and efficient service. Although popcorn, candy and soft
drinks remain the best selling concession items, the Company's theatres offer a
wide range of concession choices. The Company continually seeks to increase
concession sales through optimizing product mix, introducing special promotions
from time to time and training employees to cross sell products. In addition to
traditional concession stations, select existing theatres and theatres currently
under development feature specialty concession cafes serving items such as
cappuccino, fruit juices, cookies and muffins, soft pretzels and yogurt.
Management negotiates directly with manufacturers for many of its concession
items to ensure adequate supplies and to obtain competitive prices.

         The Company relies upon advertisements, including movie schedules
published in newspapers, to inform its patrons of film selections and show
times. Newspaper advertisements are typically displayed in a single grouping for
all of the Company's theatres located in a newspaper's circulation area.
Multimedia advertising campaigns for major film releases are organized and
financed primarily by the film distributors.

         The Company actively markets its theatres through grand opening
promotions, including "VIP" preopening parties, newspaper and radio advertising,
television commercials in certain markets and promotional activities such as
live music, spotlights and skydivers, which frequently generate media coverage.
The Company also utilizes special marketing programs for specific films and
concession items.

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The Company seeks to develop patron loyalty through a number of marketing
programs such as free summer children's film series, cross-promotion ticket
redemptions and promotions within local communities.

         As of December 31, 1998, the Company operated 36 theatres with an
aggregate of 222 screens, which exhibit second-run movies and charge lower
admission prices (typically $1.00 to $2.00). These movies are the same high
quality features shown at all of the Company's theatres. The terminology
second-run is an industry term for the showing of movies after the film has been
shown for varying periods of time at other theatres. The Company believes that
the increased attendance resulting from lower admission prices and the lower
film rental costs of second-run movies compensate for the lower admission prices
and slightly higher operating costs as a percentage of admission revenues at the
Company's discount theatres. The design, construction and equipment in the
Company's discount theatres are of the same high quality as its first-run
theatres. The Company's discount theatres generate theatre level cash flows
similar to the Company's first-run theatres.

SEASONALITY

         The Company's revenues are usually seasonal, coinciding with the timing
of releases of motion pictures by the major distributors. Generally, the most
marketable motion pictures are released during the summer and the Thanksgiving
through year-end holiday season. The unexpected emergence of a hit film during
other periods can alter the traditional trend. The timing of movie releases can
have a significant effect on the Company's results of operations, and the
results of one quarter are not necessarily indicative of results for the next
quarter. The seasonality of motion picture exhibition, however, has become less
pronounced in recent years as studios have begun to release major motion
pictures somewhat more evenly throughout the year.

FILM LICENSING

         The Company licenses films from distributors on a film-by-film and
theatre-by-theatre basis. The Company negotiates directly with film
distributors. Prior to negotiating for a film license, the Company evaluates the
prospects for upcoming films. Criteria considered for each film include cast,
director, plot, performance of similar films, estimated film rental costs and
expected Motion Picture Association of America rating. Successful licensing
depends greatly upon the exhibitor's knowledge of trends and historical film
preferences of the residents in markets served by each theatre, as well as on
the availability of commercially successful motion pictures.

         Films are licensed from film distributors owned by major film
production companies and from independent film distributors that generally
distribute films for smaller production companies. Film distributors typically
establish geographic film licensing zones and allocate each available film to
one theatre within that zone. Film zones generally encompass a radius of three
to five miles in metropolitan and suburban markets, depending primarily upon
population density. As of December 31, 1998, the Company believes that
approximately 74% of its screens were located in film licensing zones in which
such theatres were the sole exhibitors, permitting the Company to exhibit many
of the most commercially successful films in these zones.

         In film zones where the Company is the sole exhibitor, the Company
obtains film licenses by selecting a film from among those offered and
negotiating directly with the distributor. In film zones where there is
competition, a distributor will either require the exhibitors in the zone to bid
for a film or will allocate its films among the exhibitors in the zone. When
films are licensed under the allocation process, a distributor will select an
exhibitor, who then negotiates film rental terms directly with the distributor.
Over the past several years, distributors have generally used the allocation
rather than bidding process to license

                                        8
<PAGE>   12
their films. When films are licensed through a bidding process, exhibitors
compete for licenses based upon economic terms. The Company currently does not
bid for films in any of its markets, although it may be required to do so in the
future. Although the Company predominantly licenses first-run films, if a film
has substantial remaining potential following its first-run, the Company may
license it for a second-run. Film distributors establish second-run availability
on a national or market-by-market basis after the release from first-run
theatres.

         Film licenses entered into in either a negotiated or bidding process
typically specify rental fees based on the higher of a gross receipts formula or
a theatre admissions revenue formula. Under a gross receipts formula, the
distributor receives a specified percentage of box office receipts, with the
percentage declining over the term of the film run. First-run film rental fees
may begin at up to 70% of admission revenues and gradually decline to as low as
30% over a period of four weeks or more. Second-run film rental fees typically
begin at 35% of admission revenues and often decline to 30% after the first
week. Under a theatre admissions revenue formula, the distributor receives a
specified percentage of the excess of admission revenues over a negotiated
allowance for theatre expenses. In addition, the Company is occasionally
required to pay non-refundable guarantees of film rental fees or to make
refundable advance payments of film rental fees or both in order to obtain a
license for a film. Rental fees actually paid by the Company generally are
adjusted subsequent to the exhibition of a film in a process known as
settlement. The commercial success of a film relative to original distributor
expectations is the primary factor taken into account in the settlement process;
secondarily, the past performance of other films in a specific theatre is a
factor. To date, the settlement process has not resulted in material adjustments
in the film rental fees accrued by the Company.

         The Company's business is dependent upon the availability of marketable
motion pictures, its relationships with distributors and its ability to obtain
commercially successful films. Many distributors provide quality first-run
movies to the motion picture exhibition industry; however, according to industry
reports, eight distributors accounted for approximately 94% of industry
admission revenues during 1997, and 46 of the top 50 grossing films. No single
distributor dominates the market. Disruption in the production of motion
pictures by the major studios and/or independent producers, the lack of
commercial success of motion pictures or the Company's inability to otherwise
obtain motion pictures for exhibition would have a material adverse effect upon
the Company's business. The Company licenses films from each of the major
distributors and believes that its relationships with distributors are good.
From year to year, the revenues attributable to individual distributors will
vary widely depending upon the number and quality of films each distributes. The
Company believes that in 1998 no single distributor accounted for more than 21%
of the films licensed by the Company, or films producing more than 21% of the
Company's admission revenues.

COMPLEMENTARY CONCEPTS

         IMAX(R) 3-D Theatres. The Company has signed an agreement to include
IMAX(R) 3-D theatres in ten new multiplex theatre projects over the next five
years, the first of which opened in Chicago in November 1998. Management
believes that the Company's theatres with IMAX(R) 3-D, which will contain highly
automated projection systems and specialized sound systems, will draw higher
traffic levels than theatres without them, allow the Company to attract patrons
during non-peak hours and expand its customer base in certain markets.

         FunScapes(TM). To complement the Company's theatre development, the
Company operates its FunScapes(TM) entertainment complexes in certain locations
which are designed to increase both the drawing radius for patrons and patron
spending by offering a wider array of entertainment options at a single
destination. As of December 31, 1998, the Company operated FunScapes(TM) in
Chesapeake, Virginia; Rochester, New York; Syracuse, New York; Brandywine,
Delaware; Fort Lauderdale, Florida; Nashville, Tennessee and Knoxville,
Tennessee. The Company currently has one FunScapes(TM) under construction and

                                        9
<PAGE>   13
has no plans to develop additional FunScapes(TM). The $6.0 million to $10.0
million estimated cost of construction of an entertainment center is comparable
to the cost of constructing the adjacent theatre complex. Each complex includes
a nine to 16 screen theatre and a 50,000 to 70,000 square foot family
entertainment center, which generally features a 36-hole, tropical-themed
miniature golf course, a children's soft play and exercise area, laser tag,
video batting cages, a video golf course, virtual reality games, a high-tech
video arcade and party rooms. A food court connects the theatres to the
entertainment center and features nationally recognized brand name pizza, taco,
sandwich and dessert restaurants. Each theatre and entertainment center totals
approximately 95,000 to 140,000 square feet and management believes the facility
is a comprehensive entertainment destination.

         The Company is currently exploring its strategic alternatives with
respect to all of its FunScapes(TM) locations, other than the one in Knoxville,
Tennessee, and currently expects that these locations will be sold during the
next fiscal year. Otherwise, the Company intends to pursue other alternatives
including, but not limited to, subleasing these locations. In the fourth quarter
of 1998, management recorded an impairment charge of $36.9 million ($22.5
million after tax) with respect to those FunScapes(TM) locations.


COMPETITION

         The motion picture exhibition industry is fragmented and highly
competitive, particularly in film licensing, attracting patrons and finding new
theatre sites. Theatres operated by national and regional circuits and by
smaller independent exhibitors compete with the Company's theatres. Many of the
Company's competitors have been in existence longer than the Company has and may
be better established in some of its existing and future markets. The Company
believes that the principal competitive factors in the motion picture exhibition
industry include: licensing terms; the seating capacity, location and reputation
of an exhibitor's theatres; the quality of projection and sound equipment at the
theatres; and the exhibitor's ability and willingness to promote the films.

         In those areas where real estate is readily available, there are few
barriers preventing competing companies from opening theatres near one of the
Company's existing theatres, which may have a material adverse effect on the
Company's theatre. In addition, competitors have built or are planning to build
theatres in certain areas in which the Company operates, which may result in
excess capacity in such areas and adversely affect attendance and pricing at the
Company's theatres in such areas.

         In addition, alternative motion picture exhibition delivery systems,
including cable television, video disks and cassettes, satellite and
pay-per-view services, exist for the exhibition of filmed entertainment in
periods subsequent to the theatrical release. The expansion of such delivery
systems (such as video on demand) could have a material adverse effect upon the
Company's business and results of operations. The Company also competes for the
public's leisure time and disposable income with all forms of entertainment,
including sporting events, concerts, live theatre and restaurants.

MANAGEMENT INFORMATION SYSTEMS

         The Company has a significant commitment to its management information
systems, some of which have been developed internally. The point of sale
terminals within each theatre provide comprehensive information to the corporate
office each morning. These daily management reports address all aspects of
theatre operations, including concession sales, fraud detection and film
booking. Payroll information is gathered daily from theatres through the use of
automated time keeping systems, enabling a daily comparison of actual to
budgeted labor for each theatre. The Company's systems allow it to properly
schedule and

                                       10
<PAGE>   14
manage its hourly workforce. A corporate help desk is also available to monitor
and resolve any processing problems that might arise in the theatres.

EMPLOYEES

         As of December 31, 1998, the Company employed 12,000 persons, of which
1,551 were full-time and 10,449 were part-time employees. Of the Company's
employees, 334 were corporate personnel, 1,815 were theatre management personnel
and the remainder were hourly theatre personnel. Film projectionists at nine of
the Company's theatres in the Seattle, Washington; Las Vegas, Nevada; Nashville,
Tennessee; and Cleveland and Youngstown, Ohio markets are represented by the
International Alliance of Theatrical Stage Employees and Moving Picture Machine
Operators of the United States and Canada ("IATSE"). Certain other employees of
the Company in the State of Washington are also represented by the IATSE. The
Company's collective bargaining agreements with the IATSE expire over various
periods through March 2000. The Company's expansion into new markets may
increase the number of employees represented by unions. The Company considers
its employee relations to be good.

REGULATION

         The distribution of motion pictures is in large part regulated by
federal and state antitrust laws and has been the subject of numerous antitrust
cases. The Company has never been a party to any of such cases, but the manner
in which it can license films is subject to consent decrees resulting from these
cases. Consent decrees bind certain major film distributors and require the
films of such distributors to be offered and licensed to exhibitors, including
the Company, on a theatre-by-theatre basis. Consequently, exhibitors cannot
assure themselves of a supply of films by entering into long-term arrangements
with major distributors, but must negotiate for licenses on a film-by-film and
theatre-by-theatre basis.

         The Company's theatres must comply with Title III of the Americans with
Disabilities Act of 1990 (the "ADA") to the extent that such properties are
"public accommodations" and/or "commercial facilities" as defined by the ADA.
Compliance with the ADA requires that public accommodations "reasonably
accommodate" individuals with disabilities and that new construction or
alterations made to "commercial facilities" conform to accessibility guidelines
unless "structurally impracticable" for new construction or technically
infeasible for alterations. Non-compliance with the ADA could result in the
imposition of injunctive relief, fines, an award of damages to private litigants
and additional capital expenditures to remedy such noncompliance. The Company
believes that it is in substantial compliance with all current applicable
regulations relating to accommodations for the disabled. The Company intends to
comply with future regulations in this regard, and the Company does not
currently anticipate that compliance will require the Company to expend
substantial funds.

         The Company's theatre operations are also subject to federal, state and
local laws governing such matters as wages, working conditions, citizenship,
health and sanitation requirements and licensing. At December 31, 1998,
approximately 38.7% of the Company's employees were paid at the federal minimum
wage and, accordingly, the minimum wage largely determines the Company's labor
costs for those employees.

RISK FACTORS

         This Form 10-K includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-K, including, without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and

                                       11
<PAGE>   15
Results of Operations" and "Business" may constitute forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations are
disclosed in the following risk factors (the "Cautionary Statements"). All
forward-looking statements are expressly qualified in their entirety by the
Cautionary Statements.

We Depend on Motion Picture Production and Performance and on Our Relationship
with Film Distributors

         The Company's ability to operate successfully depends upon a number of
factors, the most important of which are the availability and appeal of motion
pictures, our ability to license motion pictures and the performance of such
motion pictures in our markets. We mostly license first-run motion pictures.
Poor performance of, or disruption in the production of or our access to, these
motion pictures could hurt our business and results of operations. Because film
distributors usually release films that they anticipate will be the most
successful during the summer and holiday seasons, poor performance of these
films or disruption in the release of films during such periods could hurt our
results for those particular periods or for any fiscal year.

         Our business also depends on maintaining good relations with the major
film distributors that license films to our theatres. A deterioration in our
relationship with any of the nine major film distributors could affect our
ability to get commercially successful films and, therefore, could hurt our
business and results of operations. See "Business - Film Licensing."

         In addition, in times of recession, attendance levels experienced by
motion picture exhibitors may be adversely effected. For example, revenues
declined for the industry in 1990 and 1991.

We Have Significant Expansion Plans

         The Company's growth strategy involves constructing new multiplex
theatres and adding new screens to certain of our existing theatres. We seek to
locate our theatres in markets that we believe are underscreened or that are
served by older theatre facilities. At December 31, 1998, we had 42 new theatres
with 647 screens under construction and 51 new screens under construction at
eight existing theatres. We intend to develop approximately 700 to 800 screens
during 1999. During 1999, we expect to spend approximately $375.0 million in
connection with new theatre construction or renovations to existing theatres. We
expect to get this money from cash generated from operations, asset sale
proceeds and borrowings under our Senior Credit Facilities. There is no
guarantee, however, that we will generate enough cash flow from operations or
proceeds from asset sales or that our future borrowing capacity under our Senior
Credit Facilities will be enough to cover our anticipated spending. In addition,
we intend to continue our expansion plans over the next several years. Any
future theatre development may require financing in addition to cash generated
from operations, asset sale proceeds and borrowings under the Senior Credit
Facilities. There is no guarantee that such additional financing will be
available on reasonable terms, or at all.

         Our ability to open theatres and complete screen expansions on a timely
and profitable basis is subject to many factors, some of which are beyond our
control. There is significant competition in the United States for site
locations from both theatre companies and other businesses. There is no
guarantee that we will be able to acquire attractive theatre sites, negotiate
acceptable lease terms and build theatres and complete screen expansions on a
timely and cost-effective basis. There is also no guarantee that we will be able
to hire, train and retain skilled managers and personnel. Finally, there can be
no assurance that we will achieve our planned expansion or that our new theatres
will achieve targeted levels of profitability.


                                       12
<PAGE>   16
There Are Risks Associated with Our Acquisitions

         Our growth strategy may also involve us acquiring additional theatres
and/or theatre companies. There is substantial competition for attractive
acquisition candidates. There is no guarantee that we will be able to
successfully acquire quality theatres or theatre companies or be able to
integrate their operations into ours. There is also no guarantee that future
acquisitions will not affect our operating results, particularly right after an
acquisition while we are in the process of integrating operations. Moreover, our
strategy involves increasing net revenue while reducing operating expenses.
Although we believe that this plan is reasonable, there is no guarantee that we
will be able to carry out our plans without delay or that our plan will result
in the increased profitability, cost savings or other benefits we expected. In
addition, the integration of acquired companies requires substantial attention
from our senior management, which may limit the amount of time available to be
devoted to our day-to-day operations or to our growth strategy. Finally,
expansion of our theatre circuit can be risky if we do not effectively manage
such growth and if we have to incur additional debt in connection with such
acquisitions.

We Operate in a Competitive Environment

         The motion picture exhibition industry is very competitive. Theatres
operated by national and regional circuits and by smaller independent exhibitors
compete with our theatres. Many of our competitors have been around longer than
we have and may be better established in some of our existing and future
markets.

         We believe that the principal competitive factors in our industry are:
licensing terms, the seating capacity, location and reputation of an exhibitor's
theatres; the quality of projection and sound equipment at the theatres; and the
exhibitor's ability and willingness to promote the films. Failure to compete
well in any of these categories could hurt our business and results of
operations.

         In areas where real estate is readily available, competing companies
are able to open theatres near one of ours, which may affect our theatre.
Competitors have also built or are planning to build theatres in certain areas
in which we operate, which may result in excess capacity in such areas and hurt
attendance and pricing at our theatres in such areas. Filmgoers are generally
not brand conscious and usually choose a theatre based on the films showing
there.

         In addition, there are many other ways to view movies once the movies
leave the theatre, including cable television, video disks and cassettes,
satellite and pay-per-view services. Creating new ways to watch movies (such as
video on demand) could hurt our business and results of operations. We also
compete for the public's leisure time and disposable income with all forms of
entertainment, including sporting events, concerts, live theatre and
restaurants. See "Business - Competition."

We Depend on Our Senior Management

         Our success depends upon the continued contributions of our senior
management, including Michael L. Campbell, our Chairman, President and Chief
Executive Officer. We currently have employment contracts with Mr. Campbell and
our Chief Operating Officer, but we only maintain key-man life insurance for Mr.
Campbell. If we lost the services of Mr. Campbell it could hurt our business and
development. See "Item 11. Executive Compensation-Employment Agreements."

                                       13
<PAGE>   17
Our Quarterly Results of Operations Fluctuate

         Our revenues are usually seasonal because of the way the major film
distributors release films. Generally, the most marketable movies are released
during the summer and the Thanksgiving through year-end holiday season. An
unexpected hit film during other periods can alter the traditional trend. The
timing of movie releases can have a significant effect on our results of
operations, and our results one quarter are not necessarily the same as results
for the next quarter. The seasonality of our business, however, has lessened as
studios have begun to release major motion pictures somewhat more evenly
throughout the year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

We Have Substantial Indebtedness, Lease Commitments and Leverage

         We have a large amount of debt. As of December 31, 1998, we had
approximately $1.34 billion of indebtedness outstanding, with approximately
$493.5 million available for future borrowings under our Senior Credit
Facilities. In addition, we may incur more debt in the future, for things such
as funding future construction and acquisitions as part of our growth strategy.

         Our high degree of leverage could have negative consequences for us,
including, but not limited to, the following: (i) we will have to repay our
debt, which would reduce funds available for operations and future business
opportunities and increase our vulnerability to bad general economic and
industry conditions and competition; (ii) our ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate or other purposes, may be limited; (iii) our leveraged
position and the provisions in our indentures and Senior Credit Facilities could
limit our ability to compete, as well as our ability to expand, including
through acquisitions, and to make capital improvements; and (iv) our ability to
refinance our debt in order to pay it when it matures or upon a change of
control may be adversely affected. In addition, some of the debt under our
Senior Credit Facilities bears interest at floating rates which makes our
operating results sensitive to fluctuations in interest rates. There can be no
guarantee that our future cash flow will be sufficient to meet our obligations
and commitments, and any such insufficiency could hurt our business.

         For the twelve month period ended December 31, 1998, our interest
expense was approximately $59.3 million, which would increase to $115.0 million
on a pro forma basis for such period assuming that the Transactions, the Act III
Combination, the Tack-On Offering and the Debenture Offering occurred at the
beginning of fiscal 1998. For 1998, the amount we paid under our non-cancelable
operating leases was $82.0 million, which would increase to $94.9 million on a
pro forma basis for such period assuming that the Transactions, the Act III
Combination, the Tack-On Offering and the Debenture Offering occurred at the
beginning of fiscal 1998. The Company has also entered into certain lease
agreements for the operation of theatres not yet constructed. As of December 31,
1998, the total future minimum rental payments under the terms of these leases
approximates $1.9 billion to be paid over 15 to 20 years.

There Is No Guarantee We Will Be Able to Service Our Debt

         Our ability to make scheduled payments on our debt, or to refinance our
debt depends on our performance, which may be subject to economic, financial,
competitive and other factors beyond our control. Based upon our current
operations and anticipated growth, we believe that future cash flow from
operations, together with the available borrowings under our Senior Credit
Facilities, will be adequate to meet our anticipated needs for capital
expenditures, interest payments and scheduled principal payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." There can be no guarantee,
however, that our business will continue to generate sufficient cash flow from
operations in the future to service our debt and make necessary capital
expenditures. If this should occur, we may be required to refinance all or a
portion of our debt, to sell assets or to obtain additional financing. There can
be no guarantee that any such refinancing would be possible,

                                       14
<PAGE>   18
that any assets could be sold (or, if sold, of the timing of such sales and the
amount of proceeds realized therefrom) or that additional financing could be
obtained on acceptable terms, if at all.

We Are Subject to Restrictive Debt Covenants

         Our indentures and our Senior Credit Facilities contain certain
covenants that restrict, among other things, our ability to incur additional
debt, pay dividends or make certain types of payments, enter into certain
transactions with affiliates, merge or consolidate with any other person or sell
all or substantially all of our assets. In addition, the Senior Credit
Facilities contain other limitations including restrictions on us prepaying
debt, and also require us to maintain specified financial ratios. Our ability to
comply with these financial ratios can be affected by events beyond our control
and there can be no guarantee that we will meet those tests. A breach of any of
these provisions could result in a default under the Senior Credit Facilities,
which would allow the lenders to declare all amounts outstanding thereunder
immediately due and payable. If we were unable to pay those amounts, the lenders
could proceed against the collateral securing that debt. If the amounts
outstanding under the Senior Credit Facilities were accelerated, there can be no
guarantee that the assets of the Company would be sufficient to repay the amount
in full.

Hicks Muse and KKR Effectively Control the Company

         Each of Hicks Muse and KKR currently owns approximately 46.3% of the
Company. Therefore, if they vote together, Hicks Muse and KKR have the power to
elect a majority of the directors of the Company and exercise control over our
business, policies and affairs. We have a stockholders agreement with KKR and
Hicks Muse, which requires us to obtain the approval of the board designees of
each of Hicks Muse and KKR before the Board of Directors may take any action.
The stockholders agreement, however, does not contain any "deadlock" resolution
mechanisms.

                                       15
<PAGE>   19
ITEM 2.  PROPERTIES

         As of December 31, 1998, the Company operated 256 of its 403 theatres
pursuant to lease agreements, owned the land and buildings for 100 theatres and
operated 47 locations pursuant to ground leases. Of the 403 theatres operated by
the Company as of December 31, 1998, 314 were acquired as existing theatres and
89 have been developed by the Company.

         The majority of the Company's leased theatres are subject to lease
agreements with original terms of 20 years or more and, in most cases, renewal
options for up to an additional ten years. These leases provide for minimum
annual rentals and the renewal options generally provide for increased rent.
Under certain conditions, further rental payments may be based on a percentage
of revenues above specified amounts. A significant majority of the leases are
net leases, which require the Company to pay the cost of insurance, taxes and a
portion of the lessor's operating costs.

         The Company's corporate office is located in approximately 70,000
square feet of space in Knoxville, Tennessee, which the Company acquired in
1994. The Company believes that these facilities are adequate for its
operations.

ITEM 3.  LEGAL PROCEEDINGS

         From time to time the Company is involved in routine litigation and
proceedings in the ordinary course of business. The Company does not have any
litigation that management believes is likely to have a material adverse effect
upon the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

         No matters were submitted to a vote of the shareholders during the
fourth quarter ended December 31, 1998.

                                       16
<PAGE>   20
                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
         MATTERS.

         There is no established public trading market for the Company's Common
Stock. At March 30, 1999, there were approximately 141 holders of record of the
Company's Common Stock.

         The Company has not declared or paid a cash dividend on its Common
Stock. It is the present policy of the Board of Directors to retain all earnings
to support operations and to finance expansion. The Company is restricted from
the payment of cash dividends under its Senior Credit Facilities and the
indentures governing its senior subordinated debt.

                                       17
<PAGE>   21
ITEM 6.  SELECTED FINANCIAL DATA

The selected historical consolidated financial data set forth below were derived
from the consolidated financial statements of the Company. The selected
historical consolidated financial data of the Company as of and for the year
ended December 31, 1998 were derived from the consolidated financial statements
and the notes thereto of the Company, which have been audited by Deloitte &
Touche LLP, independent auditors, whose report has been included herein. The
selected historical consolidated financial data of the Company as of and for the
years ended December 29, 1994, December 28, 1995, January 2, 1997 and January 1,
1998 were derived from the consolidated financial statements and the notes
thereto of the Company, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The consolidated balance sheets at January 2, 1997 and
January 1, 1998 and the related consolidated statements of income, changes in
shareholders' equity and of cash flows for the three years ended January 1, 1998
and notes thereto appear elsewhere herein. The PricewaterhouseCoopers LLP report
on the fiscal year 1995 and 1996 financial statements is based in part on the
report of other independent auditors. The report of other independent auditors
with respect to the fiscal year 1996 financial statements appears elsewhere
herein. The selected historical consolidated financial data set forth below
should be read in conjunction with, and are qualified in their entirety by
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
                                                                                          FISCAL YEAR ENDED
                                                                -------------------------------------------------------------------
                                                                DECEMBER 29,  DECEMBER 28,   JANUARY 2,    JANUARY 1,   DECEMBER 31,
                                                                    1994         1995          1997          1998           1998
                                                                -----------   -----------   -----------   -----------   -----------
                                                                           (IN MILLIONS, EXCEPT FOR PERCENTAGES, RATIOS AND
                                                                                              OPERATING DATA)
<S>                                                             <C>           <C>           <C>           <C>           <C>
CONSOLIDATED STATEMENT OF
  OPERATIONS DATA:
    Revenue:
      Admissions                                                $     185.2   $     213.4   $     266.0   $     325.1   $     462.8
      Concessions                                                      74.7          87.3         110.2         137.2         202.4
      Other operating revenues                                          5.1           8.3          14.9          21.3          41.8
                                                                -----------   -----------   -----------   -----------   -----------
           Total revenues                                             265.0         309.0         391.1         483.6         707.0

  Operating expenses:
    Film rental and advertising costs                                 101.0         115.4         145.2         178.2         251.3
    Cost of concessions and other                                       9.9          11.4          17.1          21.1          31.7
    Theatre operating expenses                                         92.9         105.7         127.7         156.5         241.7
    General and administrative expenses                                14.1          14.8          16.6          16.6          20.4
                                                                -----------   -----------   -----------   -----------   -----------
           Total costs and expenses                                   217.9         247.3         306.6         372.4         545.1
                                                                -----------   -----------   -----------   -----------   -----------
           Sub-total                                                   47.1          61.7          84.5         111.2         161.9
    Depreciation and amortization                                      13.6          19.4          24.7          30.5          52.4
    Merger expenses                                                     5.1           1.2           1.6           7.8          --
    Recapitalization expenses                                          --            --            --            --            65.7
    Loss on impairment of assets (1)                                   --            --            --             5.0          67.9
                                                                -----------   -----------   -----------   -----------   -----------
  Operating income (loss)                                              28.4          41.1          58.2          67.9         (24.1)
  Other (income) expense:
    Interest expense                                                    7.2          10.3          12.8          14.0          59.3
    Interest income                                                    --            --            (0.6)         (0.8)         (1.5)
    Other                                                              --             0.7          (0.7)          0.4           1.9
                                                                -----------   -----------   -----------   -----------   -----------
  Income (loss) before income taxes and extraordinary item             21.2          30.1          46.7          54.3         (83.8)
  (Provision for) benefit from income taxes                            (8.5)        (12.2)        (20.8)        (19.1)         22.2
                                                                -----------   -----------   -----------   -----------   -----------
  Income (loss) before extraordinary item                              12.7          17.9          25.9          35.2         (61.7)
  Extraordinary item:
    Loss on extinguishment of debt, net of applicable taxes             1.8           0.4           0.8          10.0          11.9
                                                                -----------   -----------   -----------   -----------   -----------

  Net income (loss)                                             $      10.9   $      17.5   $      25.1   $      25.2   $     (73.6)
                                                                ===========   ===========   ===========   ===========   ===========

OPERATING AND OTHER FINANCIAL DATA(4):
  Cash flow provided by operating activities                    $      36.5   $      40.0   $      67.5   $      64.0   $      44.2
  Cash flow used in investing activities                        $     106.4   $     112.6   $     131.1   $     202.3   $     295.4
  Cash flow provided by financing activities                    $      63.5   $      69.8   $      72.2   $     139.6   $     253.4
  EBITDA (2)                                                    $      47.1   $      61.7   $      84.5   $     111.2   $     161.9
  EBITDAR (2)                                                   $      79.6   $      96.2   $     125.9   $     164.9   $     242.8
  EBITDA margin (3)                                                  17.8 %        20.0 %        21.7 %        23.2 %        22.9 %
  EBITDAR margin (3)                                                 30.0 %        31.1 %        32.4 %        34.4 %        34.3 %

  Theatre locations                                                     195           206           223           256           403
  Screens                                                             1,397         1,616         1,899         2,306         3,573
  Average screens per location                                          7.2           7.8           8.5           9.0           8.9
  Attendance (in thousands)                                          49,690        55,091        65,530        76,331       102,702
  Average ticket price                                          $      3.73   $      3.87   $      4.06   $      4.26   $      4.51
  Average concessions per patron                                $      1.50   $      1.58   $      1.68   $      1.80   $      1.97
BALANCE SHEET DATA:
  Cash and cash equivalents                                     $       9.9   $       7.0   $      17.1   $      18.4   $      20.6
  Total assets                                                  $     252.6   $     349.0   $     488.8   $     660.6   $   1,662.0
  Long-term obligations (including current maturities)          $     117.5   $     188.5   $     144.6   $     288.6   $   1,341.1
  Shareholders' equity                                          $      88.1   $     109.0   $     279.3   $     306.6   $     202.5
</TABLE>

                                       18
<PAGE>   22
(1)  Reflects non-cash charges for the impairment of long-lived assets in
     accordance with Statement of Financial Accounting Standards No. 121,
     Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
     be Disposed of, which the Company adopted in 1995.

(2)  EBITDA represents net income before interest expense, income taxes,
     depreciation and amortization, other income or expense, extraordinary items
     and non-recurring charges. EBITDAR represents EBITDA before rent expense.
     While EBITDA and EBITDAR are not intended to represent cash flow from
     operations as defined by GAAP and should not be considered as indicators of
     operating performance or alternatives to cash flow (as measured by GAAP) as
     a measure of liquidity, they are included herein to provide additional
     information with respect to the ability of the Company to meet its future
     debt service, capital expenditure, rental and working capital requirements.

(3)  Defined as EBITDA and EBITDAR as a percentage of total revenue.

(4)  Operating theatres and screens represent the number of theatres and screens
     operated at the end of the period.




                                       19
<PAGE>   23
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

OVERVIEW

         The following analysis of the financial condition and results of
operations of Regal should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere herein. Regal
consummated the acquisitions of Georgia State Theatres, Inc. ("GST") and Cobb
Theatres, L.L.C. and entities through which Cobb Theatres, L.L.C. and Tricob
Partnership, an entity controlled by Cobb Theatres, L.L.C. members, conducted
their business (collectively, "Cobb Theatres"), on May 30, 1996 and July 31,
1997, respectively. These two acquisitions have been accounted for as poolings
of interests. On August 26, 1998, the Company consummated the acquisition of Act
III, which has been accounted for under the purchase method.

BACKGROUND OF REGAL

         Regal has achieved significant growth in theatres and screens since its
formation in November 1989. From its inception through December 31, 1998, Regal
has acquired 314 theatres with 2,326 screens, developed 89 new theatres with
1,158 screens and added 89 new screens to existing theatres. Theatres developed
by the Company typically generate positive theatre level cash flow within the
first six months following commencement of operation and reach a mature level of
attendance within one to three years following commencement of operation.
Theatre closings have had no significant effect on the operations of Regal.

RESULTS OF OPERATIONS

         The Company's revenues are generated primarily from admissions and
concession sales. Additional revenues are generated by electronic video games
located adjacent to the lobbies of certain of the Company's theatres and by
on-screen advertisements, rebates from concession vendors and revenues from the
Company's eight entertainment centers which are adjacent to theatre complexes.
Direct theatre costs consist of film rental and advertising costs, costs of
concessions and theatre operating expenses. Film rental costs are related to the
popularity of a film and the length of time since the film's release and
generally decline as a percentage of admission revenues the longer a film has
been released. Because certain concession items, such as fountain drinks and
popcorn, are purchased in bulk and not pre-packaged for individual servings, the
Company is able to improve its margins by negotiating volume discounts. Theatre
operating expenses consist primarily of theatre labor and occupancy costs. At
December 31, 1998, approximately 38.7% of the Company's employees were paid at
the federal minimum wage and, accordingly, the minimum wage largely determines
the Company's labor costs for those employees. Future increases in minimum wage
requirements or legislation requiring additional employer funding of health
care, among other things, may increase theatre operating expenses as a
percentage of total revenues.

                                       20
<PAGE>   24
         The following table sets forth for the fiscal periods indicated the
percentage of total revenues represented by certain items reflected in the
Company's consolidated statements of operations.

<TABLE>
<CAPTION>
                                                               -----------------------------------------------------
                                                                 January 2,        January 1,       December 31,
                                                                    1997              1998              1998
                                                               ---------------   --------------   ------------------
<S>                                                            <C>               <C>              <C>
Revenues:
   Admissions..............................................        68.0%            67.2%               65.5%
   Concessions.............................................        28.2             28.4                28.6
   Other operating revenue.................................         3.8              4.4                 5.9
                                                               ---------------   --------------   -----------------
   Total revenues..........................................       100.0            100.0               100.0
Operating expenses:
   Film rental and advertising costs.......................        37.1             36.8                35.5
   Cost of concessions and other...........................         4.4              4.4                 4.5
   Theatre operating expenses..............................        32.7             32.4                34.2
   General and administrative..............................         4.2              3.4                 2.9
   Depreciation and amortization...........................         6.3              6.3                 7.4
   Merger expenses.........................................         0.4              1.6                --
   Recapitalization expense................................        --               --                   9.3
   Loss on impairment of assets............................        --                1.0                 9.6
                                                               ---------------   --------------   -----------------
     Total operating expenses..............................        85.1             85.9               103.4
Other income (expense):
   Interest expense........................................        (3.3)            (2.9)               (8.4)
   Interest income.........................................         0.2              0.2                 0.2
   Other...................................................         0.2             (0.1)               (0.3)
                                                               ---------------   --------------   -----------------
   Income (loss) before taxes and extraordinary item.......        12.0             11.3               (11.9)
Provision for income taxes.................................         5.4              4.0                 3.1
                                                               ---------------   --------------   -----------------
   Income (loss) before extraordinary item.................         6.6              7.3                (8.8)
Extraordinary item:
   Loss on extinguishment of debt..........................        (0.2)            (2.1)               (1.6)
                                                               ---------------   --------------   -----------------
Net income (loss)..........................................         6.4%             5.2%              (10.4)%
                                                               ===============   ==============   =================
</TABLE>


LOSS ON IMPAIRMENT OF ASSETS

   Generally, the most marketable motion pictures are released during the summer
and the Thanksgiving through year-end holiday season. However, during the fourth
quarter of fiscal 1998, the financial results of certain theatre locations were
significantly less than expected due primarily to lower than expected theatre
attendance during the fourth quarter. The Company believes the decline in the
fourth quarter attendance at these theatres was principally due to heightened
competition from newer multiplexes operating in proximity to these theatres. As
a result, the Company revised its estimates of future cash flows from its
theatres and determined that certain locations had become impaired. Therefore,
the Company adjusted the carrying value of long-lived assets, including
goodwill, to their estimated fair market value based on discounted cash flows
and recognized an impairment loss of $31 million ($18.9 million after tax) on
these locations. Additionally, the Company determined that the carrying value of
seven of the FunScapes(TM) locations was impaired based on estimates of future
cash flows. An additional impairment charge of $36.9 million ($22.5 million
after tax) relative to the carrying value of fixed assets at these locations was
recorded based on the estimated selling price less selling costs. The Company
intends to sell these FunScapes(TM) locations during the next fiscal year.


                                       21
<PAGE>   25
FISCAL YEARS ENDED DECEMBER 31, 1998 AND JANUARY 1, 1998

         Total Revenues. Total revenues increased in 1998 by 46.2% to $707.0
million from $483.6 million in 1997. This increase was due to a 35% increase in
attendance attributable primarily to the net addition of 1,267 screens in 1998.
Of the $223.4 million increase for 1998, $70.3 million was attributed to
theatres previously operated by the Company, $93.6 million was attributed to
theatres acquired by the Company during 1998, and $59.5 million was attributed
to new theatres constructed by the Company during 1998. Average ticket prices
increased 5.9% during the period, reflecting an increase in ticket prices and a
greater proportion of larger market theatres in 1998 than in the same period in
1997. Average concession sales per customer increased 9.4% for the period,
reflecting both an increase in consumption and, to a lesser extent, an increase
in concession prices.

         Direct Theatre Costs. Direct theatre costs in 1998 increased by 47.5%
to $524.7 million from $355.8 million in 1997. Direct theatre costs as a
percentage of total revenues increased to 74.2% in 1998 from 73.6% in 1997. The
increase of direct theatre costs as a percentage of total revenues was primarily
attributable to higher theatre operating expense as a percentage of total
revenues.

         General and Administrative Expenses. General and administrative
expenses increased in 1998 by 22.6% to $20.4 million from $16.6 million in 1997,
representing administrative costs associated with the 1998 theatre openings and
projects under construction. As a percentage of total revenues, general and
administrative expenses decreased to 2.9% in 1998 from 3.4% in 1997.

         Depreciation and Amortization. Depreciation and amortization expense
increased in 1998 by 71.6% to $52.4 million from $30.5 million in 1997. This
increase was primarily the result of theatre property additions associated with
the Company's expansion efforts.

         Operating Income (Loss). Operating income (loss) for 1998 decreased by
135.5% to $(24.1) million, or (3.4)% of total revenues, from $67.9 million, or
14.0% of total revenues, in 1997. Before the $133.6 million and $12.7 million of
nonrecurring expenses for 1998 and 1997, respectively, operating income was
15.5% and 16.7% of total revenues for 1998 and 1997, respectively.

         Interest Expense. Interest expense increased in 1998 by 324.8% to $59.3
million from $14.0 million in 1997. The increase was primarily due to higher
average borrowings outstanding.

         Income Taxes. The provision for income taxes decreased in 1998 by
215.9% to $(22.2) million from $19.1 million in 1997. The effective tax rate was
26.4% in 1998 as compared to 35.2% in 1997 due primarily to certain merger and
recapitalization expenses which were not deductible for tax purposes.

         Net Income (Loss). Net income (loss) in 1998 decreased by 392.1% to
$(73.5) million from $25.2 million in 1997. Before nonrecurring merger expenses
and extraordinary items, net income was $29.6 million and $41.4 million for 1998
and 1997, respectively, reflecting a 28.5% decrease.

FISCAL YEARS ENDED JANUARY 1, 1998 AND JANUARY 2, 1997

         Total Revenues. Total revenues increased in 1997 by 23.6% to $483.6
million from $391.1 million in 1996. This increase was due to a 16.5% increase
in attendance attributable primarily to the net addition of 407 screens in 1997.
Of the $92.5 million increase for 1997, $30.3 million was attributed to theatres
previously operated by the Company, $23.5 million was attributed to theatres
acquired by the Company during 1997, and $38.7 million was attributed to new
theatres constructed by the Company during 1997. Average ticket prices increased
4.9% during the period, reflecting an increase in ticket prices and a greater


                                       22
<PAGE>   26
proportion of larger market theatres in 1997 than in the same period in 1996.
Average concession sales per customer increased 6.8% for the period, reflecting
both an increase in consumption and, to a lesser extent, an increase in
concession prices.

         Direct Theatre Costs. Direct theatre costs in 1997 increased by 22.7%
to $355.8 million from $290.0 million in 1996. Direct theatre costs as a
percentage of total revenues decreased to 73.6% in 1997 from 74.2% in 1996. The
decrease of direct theatre costs as a percentage of total revenues was primarily
attributable to lower concession costs as a percentage of total revenues.

         General and Administrative Expenses. General and administrative
expenses increased in 1997 by 0.2% to $16.6 million from $16.5 million in 1996,
representing administrative costs associated with the 1997 theatre openings and
projects under construction. As a percentage of total revenues, general and
administrative expenses decreased to 3.4% in 1997 from 4.2% in 1996.

         Depreciation and Amortization. Depreciation and amortization expense
increased in 1997 by 23.6% to $30.5 million from $24.7 million in 1996. This
increase was primarily the result of theatre property additions associated with
the Company's expansion efforts.

         Operating Income. Operating income for 1997 increased by 16.6% to $67.9
million, or 14.0% of total revenues, from $58.2 million, or 14.9% of total
revenues, in 1996. Before the $12.7 million and $1.6 million of nonrecurring
merger expenses for 1997 and 1996, respectively, operating income was 16.7% and
15.3% of total revenues.

         Interest Expense. Interest expense increased in 1997 by 8.7% to $14.0
million from $12.8 million in 1996. The increase was primarily due to higher
average borrowings outstanding.

         Income Taxes. The provision for income taxes decreased in 1997 by 8.2%
to $19.1 million from $20.8 million in 1996. The effective tax rate was 35.2% in
1997 as compared to 44.7% in 1996 as each period reflected certain merger
expenses which were not deductible for tax purposes and 1997 reflected a $2.3
million benefit associated with a deferred tax asset valuation allowance
adjustment related to Cobb Theatres.

         Net Income. Net income in 1997 increased by .5% to $25.2 million from
$25.1 million in 1996. Before nonrecurring merger expenses and extraordinary
items, net income was $41.4 million and $27.0 million for 1997 and 1996,
respectively, reflecting a 53.2% increase.

LIQUIDITY AND CAPITAL RESOURCES

         Substantially all of the Company's revenues are derived from cash box
office receipts and concession sales, while film rental fees are ordinarily paid
to distributors 15 to 45 days following receipt of admission revenues. The
Company thus has an operating cash "float" which partially finances its
operations, reducing the Company's needs for external sources of working
capital.

         The Company's capital requirements have arisen principally in
connection with acquisitions of existing theatres, new theatre openings and the
addition of screens to existing theatres and have been financed with equity
(including equity issued in connection with acquisitions and public offerings),
debt and internally generated cash. The Company's Senior Credit Facilities
provide for borrowings of up to $1,012.5 million in the aggregate, consisting of
the Revolving Credit Facility, which permits the Company to borrow up to $500.0
million on a revolving basis and $512.5 million, in the aggregate, of term loan
borrowings under three separate term loan facilities. As of December 31, 1998,
the Company had $493.5 million of capacity


                                       23
<PAGE>   27
available under the Revolving Credit Facility. Under the Senior Credit
Facilities, the Company is required to comply with certain financial and other
covenants. The loans under the Senior Credit Facilities bear interest at either
a base rate (referred to as "Base Rate Loans") or adjusted LIBOR rate (referred
to as "LIBOR Rate Loans") plus, in each case, an applicable margin determined
depending upon the Company's Total Leverage Ratio (as defined in the Senior
Credit Facilities).

         On June 10, 1996, the Company completed a public offering of 26,737,500
shares of the Company's Common Stock at $4.97 per share. The total proceeds to
the Company from the offering were approximately $126.5 million, net of the
underwriting discount and other expenses of $6.5 million and were used to repay
amounts outstanding under the Company's then existing revolving credit facility.

         On May 9, 1997, the Company completed the purchase of assets consisting
of an existing five theatres with 32 screens, four theatres with 52 screens
under development, and a seven screen addition to an existing theatre from Magic
Cinemas LLC, an independent theatre company with operations in New Jersey and
Pennsylvania. The consideration paid was approximately $24.5 million in cash.

         On July 31, 1997, Regal consummated the acquisition of the business
conducted by Cobb Theatres (the "Cobb Theatres Acquisition"). The aggregate
consideration paid by the Company was 17,593,083 shares of its Common Stock. The
acquisition has been accounted for as a pooling of interests. Regal recognized
certain one time charges totaling approximately $5.4 million (net of tax) in its
quarter ended October 2, 1997, relating to merger expenses and severance
payments. In connection with the Cobb Theatres Acquisition, Regal assumed
approximately $110 million of liabilities, including $85 million of outstanding
Senior Secured Notes (the "Cobb Notes"). The Company has repurchased all but
$70,000 principal amount of the Cobb Notes. Regal initially financed the
purchase price of the Cobb Notes with borrowings under a short-term credit
facility (the "Bank Tender Facility"). Regal recognized an extraordinary charge
totaling approximately $10.0 million (net of tax) in its quarter ended October
2, 1997, relating to the purchase of the Cobb Notes.

         On September 24, 1997, Regal consummated the offering of $125 million
aggregate principal amount of 8 1/2% Senior Subordinated Notes due October 1,
2007 (the "Old Regal Notes"). A portion of the proceeds from such offering were
used to repay amounts borrowed under the Bank Tender Facility. The balance of
the proceeds were used to repay amounts outstanding under the Company's former
bank revolving credit facility.

         On November 14, 1997, the Company completed the purchase of assets
consisting of an existing 10 theatres with 78 screens from Capitol Industries,
Inc. (known as RC Theatres), an independent theatre company with operations in
Virginia. The consideration paid was approximately $24.0 million in cash.

         At January 1, 1998, the Company anticipated that it would spend $225
million to $250 million to develop and renovate theatres during 1998, of which
the Company had approximately $131.6 million in contractual commitments for
expenditures. The actual capital expenditures for fiscal 1998 approximated
$289.5 million.

         On May 27, 1998, an affiliate of KKR and an affiliate of Hicks Muse
merged with and into the Company, with the Company continuing as the surviving
corporation. The consummation of the Regal Merger resulted in a recapitalization
of the Company. In the Recapitalization, the Company's existing holders of
Common Stock received cash for their shares of Common Stock, and KKR, Hicks
Muse, DLJ and certain members of the Company's management acquired the Company.
In addition, in connection with the Recapitalization, the Company canceled
options and repurchased warrants held by certain directors,


                                       24
<PAGE>   28
management and employees of the Company. The aggregate purchase price paid to
effect the Regal Merger and the Option/Warrant Redemption was approximately $1.2
billion.

         In connection with the Recapitalization, the Company made an offer to
purchase (the "Tender Offer") all $125.0 million aggregate principal amount of
the Old Regal Notes. In conjunction with the Tender Offer, the Company also
solicited consents to eliminate substantially all of the covenants contained in
the indenture relating to the Old Regal Notes. The purchase price paid by the
Company for the Old Regal Notes was approximately $139.5 million, including a
premium of approximately $14.5 million.

         On May 27, 1998, the Company issued the Original Notes. The net
proceeds from the sale of the Original Notes, initial borrowings of $375.0
million under the Company's Senior Credit Facilities and $776.9 million in
proceeds from the Equity Investment were used: (i) to fund the cash payments
required to effect the Regal Merger and the Option/Warrant Redemption; (ii) to
repay and retire the Company's then existing senior credit facilities; (iii) to
repurchase the Old Regal Notes; and (iv) to pay related fees and expenses.

         On August 26, 1998, the Company acquired Act III. In the Act III
Merger, Act III became a wholly owned subsidiary of the Company and each share
of Act III's outstanding common stock was converted into the right to receive
one share of the Company's Common Stock. In connection with the Act III Merger,
the Company amended its Senior Credit Facilities and borrowed $383.3 million
thereunder to repay Act III's then existing bank borrowings and two senior
subordinated promissory notes, each in the aggregate principal amount of $75.0
million, which were owned by KKR and Hicks Muse.

         On November 10, 1998, the Company issued the Tack-On Notes in the
amount of $200 million under the same indenture governing the Original Notes.
The proceeds of the Tack-On Offering were used to repay and retire portions of
the Senior Credit Facilities.

         On December 16, 1998, the Company issued the Regal Debentures in the
amount of $200 million. The proceeds of the Debenture Offering were used to
repay all of the then outstanding indebtedness under the Revolving Credit
Facility and the excess was used for working capital purposes.

         Interest payments on the Regal Notes and the Regal Debentures and
interest payments and amortization with respect to the Senior Credit Facilities
represent significant liquidity requirements for the Company. The Company had
interest expense of approximately $59.3 million for the twelve month period
ended December 31, 1998. In addition, for 1998, the amount paid under the
Company's non-cancelable operating leases was $82.0 million.

         At December 31, 1998, the Company had 42 new theatres with 647 screens
and 51 screens at eight existing locations under construction. The Company
intends to develop approximately 700 to 800 screens during 1999. The Company
expects that the capital expenditures in connection with its development plan
will aggregate approximately $375.0 million during 1999, of which, as of
December 31, 1998, the Company had approximately $300.0 million in contractual
commitments for expenditures. The Company believes that its capital needs for
completion of theatre construction and development for at least the next 6 to 12
months will be satisfied by available credit under the Senior Credit Facilities,
internally generated cash flow and available cash including any excess cash from
the proceeds of the Debenture Offering.

         Based on the current level of operations and anticipated future growth
(both internally generated as well as through acquisitions), the Company
anticipates that its cash flow from operations, together with borrowings under
the Senior Credit Facilities should be sufficient to meet its anticipated
requirements for working capital, capital expenditure, interest payments and
scheduled principal payments. The Company's future operating performance and
ability to service or refinance the Regal Notes, the Regal Debentures and

                                       25
<PAGE>   29
to extend or refinance the Senior Credit Facilities will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond the Company's control.

         The Regal Notes, Regal Debentures and Senior Credit Facilities impose
certain restrictions on the Company's ability to make capital expenditures and
limit the Company's ability to incur additional indebtedness. Such restrictions
could limit the Company's ability to respond to market conditions, to provide
for unanticipated capital investments or to take advantage of business or
acquisition opportunities. The covenants contained in the Senior Credit
Facilities and/or the indentures governing the Regal Notes and the Regal
Debentures also, among other things, limit the ability of the Company to dispose
of assets, repay indebtedness or amend other debt instruments, pay
distributions, enter into sale and leaseback transactions, make loans or
advances and make acquisitions.

INFLATION; ECONOMIC DOWNTURN

         The Company does not believe that inflation has had a material impact
on its financial position or results of operations. In times of recession,
attendance levels experienced by motion picture exhibitors may be adversely
affected. For example, revenues declined for the industry in 1990 and 1991.

YEAR 2000 - STATE OF READINESS

         Potential Impact on the Company. The failure of information technology
("IT") and embedded, or "non-IT" systems, because of the Year 2000 issue or
otherwise could adversely affect the Company's operations. If not corrected,
many computer-based systems and theatre equipment, such as air conditioning
systems and fire and sprinkler systems, could encounter difficulty
differentiating between the year 1900 and the year 2000 and interpreting other
dates, resulting in system malfunctions, corruption of date or system failure.
Additionally, the Company relies upon outside third parties ("business
partners") to supply many of the products and services that it needs in its
business. Such products include films which it exhibits and concession products
which it sells. Attendance at the Company's theatres could be severely impacted
if one or more film producers are unable to produce new films because of Year
2000 issues. The Company could suffer other business disruptions and loss of
revenues if any other types of material business partners fail to supply the
goods or services necessary for the Company's operations.

         IT Systems. The Company utilizes a weighted methodology to evaluate the
readiness of its corporate and theatre level IT systems. For this purpose,
corporate and theatre system types include commercial off-the-shelf software,
custom in-house developed software, ticketing system software, concession system
software and hardware systems such as workstations and servers. The Company has
weighted each corporate and theatre system based on its overall importance to
the organization. The Company's readiness is evaluated in terms of a five-phase
process utilized in the Year 2000 strategic plan (the "Plan") with appropriate
weighting given to each phase based on its relative importance to IT system Year
2000 readiness. The phases may generally be described as follows: (i) develop
company-wide awareness; (ii) inventory and assess internal systems and business
partners and develop contingency plans for systems that cannot be renovated;
(iii) renovate critical systems and contact material business partners; (iv)
validate and test critical systems, analyze responses from critical business
partners and develop contingency plans for non-compliant partners; and (v)
implement renovated systems and contingency plans. The Company has placed a high
level of importance on its corporate and theatre software systems and a lesser
degree of importance on its hardware systems when evaluating Year 2000
readiness. As a result, the Company has focused more of its initial efforts
toward Year 2000 readiness with respect to its software systems than it has with
respect to its hardware systems. Additionally, the Company believes that the
assessment, validation and testing and implementation phases are the most
important phases in the Plan.

                                       26
<PAGE>   30
         Based on the weighting methodology described above, the Company has
assessed all of its corporate IT systems and, as of December 31, 1998, has
renovated 95% of those systems that require renovation as a result of the Year
2000 issue. In the aggregate, as of December 31, 1998, 75% of the Company's
corporate IT systems have been tested and verified as being Year 2000 ready. The
percentage of corporate IT systems that has been tested and verified as being
Year 2000 ready assumes that a significant component of commercial-off-the-shelf
software, the Global Software, Inc. financial applications, is Year 2000 ready.
This system was warranted to be Year 2000 ready when purchased. Although the
Company has plans to test and verify Global Software, Inc.'s financial
applications to validate that the implementation is in fact Year 2000 ready, it
does not believe that it has a significant risk with respect to such software.

         Based on the weighting methodology described above, the Company has
also assessed all of its theatre IT systems and, as of December 31, 1998, has
renovated 75% of those systems that require renovation as a result of the Year
2000 issue. In the aggregate, as of December 31, 1998, 75% of the Company's
theatre IT systems have been tested and verified as being Year 2000 ready.

         Overall, the Company has assessed the Plan with respect to IT systems
as being 90% complete as of December 31, 1998. Although, no assurance can be
given, the Company does not believe that it has material exposure to the Year
2000 issue with respect to its internal IT systems.

         Non-IT Systems. The Company is in the process of identifying and
assessing potential Year 2000 readiness risks associated with its non-IT systems
and with systems of its business partners. Based on budgeted and expended
personnel hours, assessment of the Company's non-IT systems and with systems of
its business partners was substantially complete as of December 31, 1998.

         Costs. Although a definitive estimate of costs associated with required
modifications to address the Year 2000 issue cannot be made until the Company
has at least completed the assessment phase of the Plan, management presently
does not expect such costs to be material to the Company's results of
operations, liquidity or financial condition. The total amount expended from
January 1, 1996 through December 31, 1998 was approximately $100,000. Based on
information presently known, the total amount expected to be expended on the
Year 2000 effort for IT systems is approximately $2,500,000, primarily comprised
of software upgrades and replacement costs, internal personnel hours and
consulting costs. To date, the Year 2000 effort has been funded primarily from
the existing IT budget.

         Readers are cautioned that forward looking statements contained in this
section should be read in conjunction with the Company's disclosures under the
heading "Forward Looking Statements." In addition to the factors listed therein
which could cause actual results to be different from those anticipated, the
following special factors could affect the Company's ability to be Year 2000
ready: (i) the Company's ability to implement the Plan; (ii) cooperation and
participation by business partners; (iii) the availability and cost of trained
personnel and the ability to recruit and retain them; and (iv) the ability to
locate all system coding requiring correction.

NEW ACCOUNTING PRONOUNCEMENTS

         During fiscal 1998, the Emerging Issues Task Force ("EITF") released
EITF Issue No. 97-10, The Effect of Lessee Involvement in Asset Construction.
The EITF addresses how an entity (lessee) that is involved with the construction
of an asset that the entity subsequently plans to lease when construction is
completed should determine whether it should be considered the owner of that
asset during the construction period. The Task Force reached a consensus that a
lessee should be considered the owner of a real estate project during the
construction period if the lessee has substantially all of the construction
period risk. As the Company's construction project agreements are currently
structured, management believes the Company

                                       27
<PAGE>   31
would be considered the owner of certain pending construction projects. As a
result, management believes the Company may be required to reflect these lease
agreements as on balance sheet financing transactions. The EITF is applicable to
all construction projects committed to subsequent to May 21, 1998 and to all
construction projects committed to on May 21, 1998 if construction does not
commence prior to December 31, 1999. The Company is currently pursuing various
alternatives including the amendment of certain existing construction project
agreements. The Company is in the process of evaluating the impact of EITF Issue
97-10 on its consolidated financial position, results of operations and cash
flows.

         On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
and Financial Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities
based on these fundamental principles: (i) derivatives represent assets and
liabilities that should be recognized at fair value on the balance sheet; (ii)
derivative gains and losses do not represent liabilities or assets and,
therefore, should not be reported on the balance sheet as deferred credits or
deferred debits; and (iii) special hedge accounting should be provided only for
transactions that meet certain specified criteria, which include a requirement
that the change in the fair value of the derivative be highly effective in
offsetting the change in the fair value or cash flows of the hedged item. This
Statement is effective for fiscal years beginning after June 15, 1999. The
Company is currently evaluating the effect that SFAS No. 133 will have on the 
Company's consolidated financial statements.

         During fiscal 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1") and SOP
98-5, Reporting on the Costs of Start-up Activities ("SOP 98-5"). SOP 98-1
requires companies to capitalize certain internal-use software costs once
certain criteria are met. SOP 98-5 requires costs of start-up activities to be
expensed when incurred. Management does not believe that adoption of these
statements will not have the material impact on the Company's consolidated
financial position, results of operations or cash flows.

                                       28
<PAGE>   32
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Interest Rate Sensitivity. The table below provides information about
the Company's derivative financial instruments and other financial instruments
that are sensitive to changes in interest rates, including interest rate swaps
and debt obligations. For debt obligations, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates.
The Company's fixed rate obligations consist primarily of $600 million senior
subordinated notes due June 1, 2008 and $200 million senior subordinated
debentures due December 15, 2010. For interest rate swaps, the table presents
notional amounts and weighted average interest rates by expected (contractual)
maturity dates. Notional amounts are used to calculate the contractual payments
to be exchanged under the contract. Weighted average variable rates are based on
implied forward rates in the yield curve at the reporting date.

($'s in thousands)

DEBT OBLIGATIONS:

<TABLE>
<CAPTION>
                                                      Fiscal Year Ending
                                      1999            2000            2001           2002

<S>                               <C>              <C>             <C>            <C>
Long-term Debt:
  Fixed Rate.................     $804,469         $804,070        $803,629       $803,143
    Average interest rate....         9.34%            9.34%           9.34%          9.34%
  Variable Rate..............      509,500          507,400         504,850        502,300
     Average interest rate...         5.44%            5.67%           5.78%          5.89%
INTEREST RATE DERIVATIVES:
Interest Rate Swaps:
 Variable to Fixed...........     $270,000         $270,000        $270,000       $270,000
    Average pay rate.........         5.48%            5.48%           5.48%          5.48%
    Average receive rate.....         5.44%            5.67%           5.78%          5.89%
<CAPTION>
                              Fiscal Year Ending
                                     2003         Thereafter      Fair Market Value at
                                                                  December 31, 1998
<S>                               <C>            <C>              <C>
Long-term Debt:
  Fixed Rate.................     $802,606       $801,955          $825,757
    Average interest rate....        9.345%          --
  Variable Rate..............      499,750        497,200          $512,500
     Average interest rate...         6.00%          --
INTEREST RATE DERIVATIVES:
Interest Rate Swaps:
 Variable to Fixed...........     $250,000           --             $(3,160)
    Average pay rate.........         5.34%          --
    Average receive rate.....         6.00%          --
</TABLE>

                                       29
<PAGE>   33
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
Index to Financial Statements
<S>                                                                                                      <C>
          Report of Independent Auditors..................................................................31
          Report of Coopers & Lybrand L.L.P., Independent Accountants.....................................32
          Report of Ernst & Young LLP, Independent Auditors...............................................33
          Consolidated Balance Sheets at January 1, 1998 and December 31, 1998............................34
          Consolidated Statements of Operations for the years ended January 2, 1997,
                  January 1, 1998 and December 31, 1998...................................................35
          Consolidated Statements of Shareholders' Equity for the years ended
                  January 2, 1997, January 1, 1998 and December 31, 1998..................................36
          Consolidated Statements of Cash Flows for the years ended January 2, 1997,
                  January 1, 1998 and December 31, 1998...................................................37
          Notes to Consolidated Financial Statements......................................................38
</TABLE>
                                       30
<PAGE>   34
INDEPENDENT AUDITORS' REPORT


Board of Directors
Regal Cinemas, Inc.
Knoxville, Tennessee

We have audited the accompanying consolidated balance sheet of Regal Cinemas,
Inc. and subsidiaries (the "Company") as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Regal Cinemas, Inc. and subsidiaries as of
December 31, 1998, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.



/s/ DELOITTE & TOUCHE LLP

February 16, 1999
Nashville, Tennessee


                                       31
<PAGE>   35



REPORT OF INDEPENDENT ACCOUNTANTS


The Board of Directors
Regal Cinemas, Inc.

We have audited the accompanying consolidated balance sheets of Regal Cinemas,
Inc. and Subsidiaries (the "Company") as of January 2, 1997 and January 1, 1998,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended January
1, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the acquisition of Cobb Theatres, L.L.C. which has been
accounted for as pooling of interests as described in Note 1 to the consolidated
financial statements. We did not audit the financial statements of Cobb
Theatres, L.L.C. for 1995 and 1996. Such statements reflect aggregate total
assets constituting 23% in 1996 and aggregate total revenues constituting 34%
and 31% in 1995 and 1996, respectively, of the related consolidated totals.
Those statements were audited by other auditors, whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for Cobb
Theatres, L.L.C. is based solely on the report of other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Regal Cinemas, Inc. and Subsidiaries as
of January 2, 1997 and January 1, 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
January 1, 1998, in conformity with generally accepted accounting principles.


                                    /s/ PricewaterhouseCoopers LLP 
                                        Coopers & Lybrand L.L.P.
                                      


Knoxville, Tennessee
February 6, 1998



                                       32

<PAGE>   36



                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


Board of Directors
Cobb Theatres, L.L.C.

We have audited the consolidated balance sheet of Cobb Theatres, L.L.C. as of
December 31, 1996 and the related consolidated statements of operations, changes
in members equity and cash flows for the year then ended (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cobb Theatres,
L.L.C. at December 31, 1996 and the consolidated results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.

                                          /s/ Ernst & Young LLP

Birmingham, Alabama
July 2, 1997



                                       33

<PAGE>   37
<TABLE>
<CAPTION>
REGAL CINEMAS, INC.

CONSOLIDATED BALANCE SHEETS
JANUARY 1, 1998 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
----------------------------------------------------------------------------------------------------------------
                                                                                  JANUARY 1,         DECEMBER 31,
ASSETS                                                                              1998                 1998
                                                                                 -----------         -----------
<S>                                                                              <C>                 <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                      $    18,398         $    20,621
  Accounts receivable                                                                  4,791               3,161
  Inventories                                                                          2,159               4,014
  Prepaid and other current assets                                                     8,801              12,999
  Deferred income tax asset                                                             --                 1,271
                                                                                 -----------         -----------
            Total current assets                                                      34,149              42,066
PROPERTY AND EQUIPMENT:
  Land                                                                                53,955             111,854
  Buildings and leasehold improvements                                               366,323             650,313
  Equipment                                                                          211,465             368,792
  Construction in progress                                                            46,529             103,253
                                                                                 -----------         -----------
                                                                                     678,272           1,234,212
  Accumulated depreciation and amortization                                         (112,927)           (139,643)
                                                                                 -----------         -----------
           Total property and equipment, net                                         565,345           1,094,569
GOODWILL, net of accumulated amortization of $5,026 and
  $10,170, respectively                                                               52,619             439,842
DEFERRED INCOME TAX ASSET                                                               --                37,538
OTHER ASSETS                                                                           8,537              47,989
                                                                                 -----------         -----------
TOTAL                                                                            $   660,650         $ 1,662,004
                                                                                 ===========         ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current maturities of long-term debt                                           $       306         $     6,524
  Accounts payable                                                                    38,982              65,592
  Accrued expenses                                                                    13,739              44,734
                                                                                 -----------         -----------
            Total current liabilities                                                 53,027             116,850
LONG-TERM DEBT, less current maturities                                              288,277           1,334,542
OTHER LIABILITIES                                                                     12,771               8,077
                                                                                 -----------         -----------
           Total liabilities                                                         354,075           1,459,469
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
  Preferred stock, no par; 100,000,000 shares authorized, none issued
    and outstanding                                                                     --                  --
  Common stock, no par; 500,000,000 shares authorized; 223,903,849 issued
    and outstanding in 1997; 216,552,105 issued and outstanding in 1998              223,707             197,427
  Loans to shareholders                                                                 --                (4,212)
  Retained earnings                                                                   82,868               9,320
                                                                                 -----------         -----------
            Total shareholders' equity                                               306,575             202,535
                                                                                 -----------         -----------
TOTAL                                                                            $   660,650         $ 1,662,004
                                                                                 ===========         ===========
</TABLE>

See notes to consolidated financial statements.


                                       34
<PAGE>   38
<TABLE>
<CAPTION>
REGAL CINEMAS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 2, 1997, JANUARY 1, 1998 AND DECEMBER 31, 1998 
(IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------------------------------------

                                                                 January 2,       January 1,        December 31,
                                                                    1997             1998               1998
                                                                 ---------         ---------         ---------
<S>                                                              <C>               <C>               <C>
REVENUES:
  Admissions                                                     $ 266,003         $ 325,118         $ 462,826
  Concessions                                                      110,237           137,173           202,418
  Other operating revenue                                           14,890            21,305            41,783
                                                                 ---------         ---------         ---------
            Total revenues                                         391,130           483,596           707,027

OPERATING EXPENSES:
  Film rental and advertising costs                                145,247           178,173           251,345
  Cost of concessions and other                                     17,066            21,072            31,657
  Theatre operating expenses                                       127,706           156,588           241,720
  General and administrative expenses                               16,581            16,609            20,355
  Depreciation and amortization                                     24,695            30,535            52,413
  Merger expenses                                                    1,639             7,789              --
  Recapitalization expenses                                           --                --              65,755
  Loss on impairment of assets                                        --               4,960            67,873
                                                                 ---------         ---------         ---------
           Total operating expenses                                332,934           415,726           731,118
                                                                 ---------         ---------         ---------

OPERATING INCOME (LOSS)                                             58,196            67,870           (24,091)
                                                                 ---------         ---------         ---------

OTHER INCOME (EXPENSE):
  Interest expense                                                 (12,844)          (13,959)          (59,301)
  Interest income                                                      619               816             1,506
  Other                                                                676              (407)           (1,942)
                                                                 ---------         ---------         ---------

INCOME (LOSS) BEFORE INCOME TAXES AND
  EXTRAORDINARY ITEM                                                46,647            54,320           (83,828)

(PROVISION FOR) BENEFIT FROM INCOME TAXES                          (20,830)          (19,121)           22,170
                                                                 ---------         ---------         ---------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                             25,817            35,199           (61,658)

EXTRAORDINARY ITEM:
  Loss on extinguishment of debt, net of applicable taxes             (751)          (10,020)          (11,890)
                                                                 ---------         ---------         ---------

NET INCOME (LOSS)                                                   25,066            25,179           (73,548)

GST DIVIDENDS                                                         (229)             --                --
                                                                 ---------         ---------         ---------

NET INCOME (LOSS) APPLICABLE TO
  COMMON STOCK                                                   $  24,837         $  25,179         $ (73,548)
                                                                 =========         =========         =========
</TABLE>

See notes to consolidated financial statements.


                                       35
<PAGE>   39
<TABLE>
<CAPTION>
REGAL CINEMAS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED JANUARY 2, 1997, JANUARY 1, 1998 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
------------------------------------------------------------------------------------------------------------------------------------

                                                                      COMMON         PREFERRED       LOANS TO
                                                                      STOCK           STOCK        SHAREHOLDERS
                                                                   -----------       --------      -----------
<S>                                                                <C>               <C>           <C>
BALANCE, DECEMBER 28, 1995                                         $    74,591       $   --        $      --
  Payment of GST dividends and
    partnership distributions                                             --             --               --
  Issuance of 31,097,594 shares of common
    stock, net of offering costs                                       140,651           --               --
  Issuance of 2,838,922 shares upon exercise of
    stock options and restricted stock awards                            1,177           --               --
  Income tax benefits related to exercised stock options                 5,017           --               --
  Conformation of Cobb Theatres fiscal year                               --             --               --
  Stock option amortization                                                177           --               --
  Net income                                                              --             --               --
                                                                   -----------       --------      -----------

BALANCE, JANUARY 2, 1997                                               221,613           --               --
  Issuance of 844,614 shares upon exercise of stock
    options and restricted stock awards                                    723           --               --
  Income tax benefits related to exercised stock options                 1,306           --               --
  Stock option amortization                                                 65           --               --
  Net income                                                              --             --               --
                                                                   -----------       --------      -----------

BALANCE, JANUARY 1, 1998                                               223,707           --               --
  Purchase and retirement of 223,937,974
    shares of common stock related to the
    Recapitalization                                                (1,119,690)          --               --
  Issuance of 2,630,556 shares of common stock
    related to the Recapitalization                                     13,153           --               --
  Issuance of 15,277 shares of Series A
    Convertible Preferred Stock related to the
    Recapitalization                                                      --          763,820             --
  Conversion of 15,277 shares of Series A
    Convertible Preferred Stock to 152,763,973 shares of
    common stock                                                       763,820       (763,820)            --
  Issuance of 60,383,388 shares of common stock and 5,195,598
    options to purchase the Company's common stock
    related to the acquisition of Act III                              312,157           --               --
  Issuance of 808,313 shares of common stock
    in exchange for shareholder loans                                    4,212           --             (4,212)
  Stock option amortization                                                 68           --               --
  Net loss                                                                --             --               --
                                                                   -----------       --------      -----------

BALANCE, DECEMBER 31, 1998                                         $   197,427       $     --      $    (4,212)
                                                                   ===========       ========      ===========
<CAPTION>
                                                                     RETAINED
                                                                     EARNINGS            TOTAL
                                                                   -----------       -----------
<S>                                                                <C>               <C>
BALANCE, DECEMBER 28, 1995                                         $    34,429       $   109,020
  Payment of GST dividends and
    partnership distributions                                             (263)             (263)
  Issuance of 31,097,594 shares of common
    stock, net of offering costs                                          --             140,651
  Issuance of 2,838,922 shares upon exercise of
    stock options and restricted stock awards                             --               1,177
  Income tax benefits related to exercised stock options                  --               5,017
  Conformation of Cobb Theatres fiscal year                             (1,543)           (1,543)
  Stock option amortization                                               --                 177
  Net income                                                            25,066            25,066
                                                                   -----------       -----------

BALANCE, JANUARY 2, 1997                                                57,689           279,302
  Issuance of 844,614 shares upon exercise of stock
    options and restricted stock awards                                   --                 723
  Income tax benefits related to exercised stock options                  --               1,306
  Stock option amortization                                               --                  65
  Net income                                                            25,179            25,179
                                                                   -----------       -----------

BALANCE, JANUARY 1, 1998                                                82,868           306,575
  Purchase and retirement of 223,937,974
    shares of common stock related to the
    Recapitalization                                                      --          (1,119,690)
  Issuance of 2,630,556 shares of common stock
    related to the Recapitalization                                       --              13,153
  Issuance of 15,277 shares of Series A
    Convertible Preferred Stock related to the
    Recapitalization                                                      --             763,820
  Conversion of 15,277 shares of Series A
    Convertible Preferred Stock to 152,763,973 shares of
    common stock                                                          --                --
  Issuance of 60,383,388 shares of common stock and 5,195,598
    options to purchase the Company's common stock
    related to the acquisition of Act III                                 --             312,157
  Issuance of 808,313 shares of common stock
    in exchange for shareholder loans                                     --                --
  Stock option amortization                                               --                  68
  Net loss                                                             (73,548)          (73,548)
                                                                   -----------       -----------

BALANCE, DECEMBER 31, 1998                                         $     9,320       $   202,535
                                                                   ===========       ===========
</TABLE>

See notes to consolidated financial statements.


                                       36
<PAGE>   40
<TABLE>
<CAPTION>
REGAL CINEMAS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 2, 1997, JANUARY 1, 1998 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------------------------------

                                                                             JANUARY 2,            JANUARY 1,           DECEMBER 31,
                                                                                1997                  1998                  1998
                                                                              -----------         -----------         -----------
<S>                                                                           <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                           $    25,066         $    25,179         $   (73,548)
  Adjustments to reconcile net income (loss) to net
    cash provided by operating activities:
Depreciation and amortization                                                      24,695              30,535              52,413
Non-cash loss on extinguishment of debt                                               751               2,575               4,975
Loss on impairment of assets                                                         --                 4,960              67,873
Deferred income taxes                                                               4,112               1,293             (29,771)
Changes in operating assets and liabilities, net of effects from
    acquisitions:
    Accounts receivable                                                            (1,182)             (1,899)              3,585
    Inventories                                                                      (365)               (135)               (118)
    Prepaids and other current assets                                               4,521               2,150              (3,373)
    Accounts payable                                                               10,878               2,881              13,054
    Accrued expenses and other liabilities                                           (946)             (3,579)              9,132
                                                                              -----------         -----------         -----------
        Net cash provided by operating activities                                  67,530              63,960              44,222

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures, net                                                      (124,068)           (178,099)           (289,532)
  Increase in goodwill and other assets                                            (7,077)            (24,198)             (5,829)
                                                                              -----------         -----------         -----------
        Net cash used in investing activities                                    (131,145)           (202,297)           (295,361)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings under long-term debt                                                 161,500             358,418           1,329,800
  Payments on long-term debt                                                     (211,623)           (214,460)           (688,653)
  Deferred financing costs                                                         (5,127)             (5,127)            (45,137)
  Proceeds from issuance of stock, net                                            126,763                --               774,691
  Purchase and retirement of common stock                                            --                  --            (1,117,407)
  Exercise of warrants, options and stock compensation expense                      1,177                 788                  68
  GST dividends paid                                                                 (500)               --                  --
  Partnership distribution                                                            (34)               --                  --
                                                                              -----------         -----------         -----------
        Net cash provided by financing activities                                  72,156             139,619             253,362
                                                                              -----------         -----------         -----------

NET INCREASE  IN CASH AND EQUIVALENTS                                               8,541               1,282               2,223

CASH AND EQUIVALENTS, beginning of period                                           8,575              17,116              18,398
                                                                              -----------         -----------         -----------

CASH AND EQUIVALENTS, end of period                                           $    17,116         $    18,398         $    20,621
                                                                              ===========         ===========         ===========
</TABLE>

See notes to consolidated financial statements.


                                       37
<PAGE>   41
REGAL CINEMAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 2, 1997, JANUARY 1, 1998 AND DECEMBER 31, 1998

1.    THE COMPANY AND RECAPITALIZATION

      Regal Cinemas, Inc. and its wholly owned subsidiaries (the "Company" or
      "Regal") operates multi-screen motion picture theatres principally
      throughout the eastern and northwestern United States.

      On May 27, 1998, an affiliate of Kohlberg Kravis Roberts & Co. L.P.
      ("KKR") and an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks
      Muse") merged with and into Regal Cinemas, Inc., with the Company
      continuing as the surviving corporation of the Merger (the "Merger"). The
      Merger and related transactions have been recorded as a recapitalization
      (the "Recapitalization"). In the Recapitalization, the Company's existing
      shareholders received cash for their shares of common stock. In addition,
      in connection with the Recapitalization, the Company canceled options and
      repurchased warrants held by certain former directors, management and
      employees of the Company (the "Option/Warrant Redemption"). The aggregate
      amount paid to effect the Merger and the Option/Warrant Redemption was
      approximately $1.2 billion.

      The net proceeds of a $400 million senior subordinated note offering,
      initial borrowings of $375.0 million under senior credit facilities and
      the proceeds of $776.9 million from the investment by KKR, Hicks Muse, DLJ
      Merchant Banking Partners II, L.P. and affiliated funds ("DLJ") and
      management in the Company were used: (i) to fund the cash payments
      required to effect the Merger and the Option/Warrant Redemption; (ii) to
      repay and retire the Company's existing senior credit facilities; (iii) to
      repurchase the Company's existing 8.5% senior subordinated notes; and (iv)
      to pay related fees and expenses. Upon consummation of the Merger, KKR
      owned $287.3 million of the Company's equity securities, Hicks Muse owned
      $437.3 million of the Company's equity securities and DLJ owned $50.0
      million of the Company's equity securities. Each investor received
      securities consisting of a combination of the Company's common stock, no
      par value ("Common Stock"), and the Company's Series A Convertible
      Preferred Stock, no par value ("Convertible Preferred Stock"), which was
      converted into Common Stock on June 3, 1998. To equalize KKR's and Hicks
      Muse's investments in the Company at $362.3 million each, Hicks Muse
      exchanged $75.0 million of Convertible Preferred Stock, with KKR for $75.0
      million of common stock of Act III Cinemas, Inc. ("Act III"). As a result
      of the Recapitalization and the Act III Merger (see Note 3), KKR and Hicks
      Muse each own approximately 46.3% of the Company's Common Stock, with DLJ,
      management and other minority holders owning the remainder.

      During 1998, nonrecurring costs of approximately $65.7 million, including
      approximately $41.9 million of compensation costs, were incurred in
      connection with the Recapitalization. Financing costs of approximately
      $34.2 million were incurred and classified as deferred financing costs
      which will be amortized over the lives of the new debt facilities (see
      Note 5). Of the total Merger and Recapitalization costs above, an
      aggregate of $19.5 million was paid to KKR and Hicks Muse.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
      include the accounts of Regal and its wholly owned subsidiaries. Prior to
      the merger with Regal, Cobb Theatres, L.L.C. and Tricob Partnership, an
      entity controlled by the members of Cobb Theatres, L.L.C., collectively
      referred to as

                                       38
<PAGE>   42
      "Cobb Theatres", formerly operated and reported on a fiscal year ended
      August 31. Cobb Theatres' fiscal year 1996 financial statements were
      conformed to Regal's fiscal year end and the accompanying consolidated
      statement of changes in shareholders' equity reflects a charge directly to
      retained earnings representing a net loss incurred by Cobb Theatres for
      the period from September 1, 1995 through December 31, 1995.

      All significant intercompany accounts and transactions have been
      eliminated from the consolidated financial statements.

      FISCAL YEAR - The Company formally operates with a fiscal year ending on
      the Thursday closest to December 31.

      CASH EQUIVALENTS - The Company considers all highly liquid debt
      instruments purchased with an original maturity of three months or less to
      be cash equivalents. At January 1, 1998 and December 31, 1998, the Company
      held approximately $12,549,000 and $19,559,000, respectively, in temporary
      cash investments in the form of certificates of deposit and variable rate
      investment accounts with major financial institutions.

      INVENTORIES - Inventories consist of concession products and theatre
      supplies and are stated on the basis of first-in, first-out (FIFO) cost,
      which is not in excess of net realizable value.

      PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
      Repairs and maintenance are charged to expense as incurred. Gains and
      losses from disposition of property and equipment are included in income
      and expense when realized. Depreciation and amortization are provided
      using the straight-line method over the estimated useful lives as follows:

                  Buildings and leaseholds                     20-30 years
                  Equipment                                    5-20 years

      GOODWILL - Goodwill, which represents the excess of acquisition costs over
      the net assets acquired in business combinations, is amortized on the
      straight-line method over periods ranging from 25 to 40 years.

      IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets,
      including goodwill, for impairment whenever events or changes in
      circumstances indicate that the carrying amounts of the assets may not be
      fully recoverable. If the sum of the expected future cash flows,
      undiscounted and without interest charges, is less than the carrying
      amount of the asset, an impairment charge is recognized in the amount by
      which the carrying value of the assets exceeds it fair market value.
      Assets are evaluated for impairment on an individual theatre basis, which
      management believes is the lowest level for which there are identifiable
      cash flows. The fair value of assets is determined using the present value
      of the estimated future cash flows or the expected selling price less
      selling costs for assets expected to be disposed of.

      DEBT ACQUISITION AND LEASE COSTS (INCLUDED IN OTHER ASSETS) - Debt
      acquisition and lease costs are deferred and amortized over the terms of
      the related agreements.

      INCOME TAXES - Deferred tax liabilities and assets are determined based on
      the difference between the financial statement and tax bases of assets and
      liabilities using enacted tax rates in effect for the year in which the
      differences are expected to reverse.

                                       39
<PAGE>   43
      DEFERRED REVENUE (INCLUDED IN OTHER LIABILITIES) - Deferred revenue
      relates primarily to vendor rebates. Rebates are recognized in the
      accompanying financial statements as earned.

      DEFERRED RENT (INCLUDED IN OTHER LIABILITIES) - Rent expense is recognized
      on a straight-line basis after considering the effect of rent escalation
      provisions resulting in a level monthly rent expense for each lease over
      its term.

      ADVERTISING COSTS - The Company expenses advertising costs as incurred.

      INTEREST RATE SWAPS - Interest rate swaps are entered into as a hedge
      against interest exposure of variable rate debt. The differences to be
      paid or received on swaps are included in interest expense. The fair value
      of the Company's interest rate swap agreements is based on dealer quotes.
      These values represent the amounts the Company would receive or pay to
      terminate the agreements taking into consideration current interest rates.

      ESTIMATES - The preparation of financial statements in conformity with
      generally accepted accounting principles requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the
      date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from
      those estimates.

      NEW ACCOUNTING STANDARDS - During fiscal 1998, the Company adopted the
      provisions of Statement of Financial Accounting Standards ("SFAS") No.
      130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About
      Segments of An Enterprise and Related Information. SFAS 130 requires
      disclosure of comprehensive income and its components in a company's
      financial statements and the adoption of this standard had no impact on
      the Company's financial position or results of operations. SFAS 131
      requires disclosures of segment information in a company's financial
      statements. The Company manages it business on the basis of one reportable
      segment. See Note 1 for a brief description of the Company's business and
      geographic locations.

      RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
      and 1997 financial statements to conform to the 1998 presentation.

3.    ACQUISTIONS

      On August 26, 1998, the Company acquired Act III Cinemas, Inc. (the "Act
      III Merger"). The total purchase cost was approximately $312.2 million,
      representing primarily the value of 60,383,388 shares of the Company's
      common stock issued to acquire all of Act III's outstanding common stock
      and the value of 5,195,598 options of the Company issued for Act III
      options. In connection with the Act III Merger, the Company also amended
      its credit facilities and borrowed $383.3 million thereunder to repay Act
      III's borrowings and accrued interest under Act III's existing credit
      facilities and two senior subordinated notes totaling $150.0 million.

      The Act III Merger has been accounted for as a purchase, applying the
      applicable provisions of Accounting Principles Board Opinion No. 16.
      Preliminary allocation of the purchase price as of December 31, 1998 is as
      follows:

                                       40
<PAGE>   44
<TABLE>
<CAPTION>
                                                                (IN THOUSANDS)

<S>                                                           <C>
Property, plant and equipment                                      $ 343,694
Long-term debt assumed                                              (411,337)
Net working capital acquired                                         (17,167)
Excess purchase cost over fair value of net assets acquired          396,967
                                                                   ---------
           Total purchase cost                                     $ 312,157
                                                                   =========
</TABLE>

      The above allocation of purchase cost has been preliminarily allocated to
      the acquired assets and liabilities of Act III based on estimates of fair
      value as of the closing date. Such estimates were based on valuations and
      studies which are not yet complete. Therefore, the above allocation of
      purchase price may change when such studies are completed.

      The following pro forma unaudited results of operations data gives effect
      to the Act III Merger and the Recapitalization (Note 1) as if they had
      occurred as of January 3, 1997:

<TABLE>
<CAPTION>
                                           1997            1998
                                              (IN THOUSANDS)
<S>                                      <C>             <C>
Revenues                                 $ 738,668       $ 897,459
Loss before extraordinary items            (18,601)        (67,517)
Net loss                                   (28,621)        (79,407)
</TABLE>

      On July 31, 1997, the Company issued 17,593,083 shares of its Common Stock
      for all of the outstanding common stock of Cobb Theatres. Additionally, on
      May 30, 1996, the Company issued 8,743,302 shares of its Common Stock for
      all of the outstanding common stock of Georgia State Theatres ("GST").
      Such mergers have been accounted for as poolings of interest and,
      accordingly, these consolidated financial statements have been restated
      for all periods to include the results of operations and financial
      positions of Cobb Theatres and GST.

      Separate results of the combining entities for the fiscal years 1996 and
1997 are as follows:

<TABLE>
<CAPTION>
                                                      1996            1997
                                                         (IN THOUSANDS)

<S>                                                 <C>             <C>
Revenues:
Regal                                               $267,064        $402,445
Cobb Theatres, L.L.C. and Tricob Partnership
  (through July 31 for 1997)                         119,357          81,151
GST (through May 30 for 1996)                          4,709            --
                                                    --------        --------

                                                    $391,130        $483,596
                                                    ========        ========
Net income (loss):
Regal                                              $ 29,935         $ 27,940
Cobb Theatres, L.L.C. and Tricob Partnership
  (through July 31 for 1997)                         (4,959)          (2,761)
GST (through May 30 for 1996)                            90             --
                                                   --------         --------
                                                   $ 25,066         $ 25,179
                                                   ========         ========
</TABLE>


                                       41
<PAGE>   45
      In addition to the 1998 acquisition of Act III and the GST and Cobb
      Theatre mergers described above, the Company completed the purchase of 19
      theatres with 169 screens during fiscal year 1997. The theatres were
      purchased for consideration of approximately $48.5 million cash. These
      transactions were accounted for using the purchase method of accounting
      and, accordingly, the purchase prices have been allocated at fair value to
      the separately identifiable assets (principally property and equipment,
      and leasehold improvements) of the respective theatre locations, with the
      remaining balance allocated to goodwill.

      The following unaudited pro forma results of operations data assume the
      individual fiscal 1997 acquisitions referred to above occurred as of the
      beginning of fiscal 1996:

<TABLE>
<CAPTION>
                                               1996            1997
                                                 (IN THOUSANDS)
<S>                                          <C>             <C>
Revenues                                     $415,680        $503,722
Operating income                               62,533          70,108
Income before extraordinary item               28,463          36,564
Net income applicable to common stock          27,483          26,544
</TABLE>

4.       IMPAIRMENT OF LONG-LIVED ASSETS

      During the fourth quarter of the 1998 fiscal year, the financial results
      of certain theatre locations were significantly less than expected due
      primarily to lower than expected theatre attendance during the fourth
      quarter as a result of heightened competition from the increased number of
      newer multiplexes operating throughout the industry. As a result, the
      Company revised its estimates of future cash flows from its theatre
      locations and determined that the carrying value of a number of locations
      had become impaired. Therefore the Company adjusted the carrying value of
      the long-lived assets, including goodwill, to their estimated fair market
      value based on discounted cash flows and recognized an impairment loss of
      $31.0 million ($18.9 million after tax) on these locations. Such
      impairment charge included a writedown of property and equipment of $23.7
      million and a writeoff of goodwill of $7.3 million. Additionally, the
      Company determined that the carrying value of seven Funscapes(TM)
      locations was impaired based on estimates of future cash flows. An
      additional impairment charge of $36.9 million ($22.5 million after tax)
      relative to the net book value of fixed assets at these locations was
      recorded based on the estimated selling price less selling costs. The
      Company intends to sell these Funscapes(TM) locations during the next
      fiscal year.

      During the fiscal year 1997, the Company recognized a non-cash loss on
      impairment of assets of $4.9 million dollars ($3.0 million after tax)
      principally related to declines in cash flows for certain theatres located
      in markets experiencing declining box office results.


                                       42
<PAGE>   46
5.    LONG-TERM DEBT

      Long-term debt at January 1, 1998 and December 31, 1998, consists of the
      following:

<TABLE>
<CAPTION>
                                                                                        JANUARY 1,       DECEMBER 31,
                                                                                           1998              1998
                                                                                              (IN THOUSANDS)
<S>                                                                                   <C>               <C>
      $600,000 of the Company's senior subordinated notes due June 1, 2008, with
      interest payable semiannually at 9.5%. Notes are redeemable, in whole or
      in part, at the option of the Company at any time on or after June 1,
      2003, at the redemption prices (expressed as percentages of the principal
      amount thereof) set forth below together with accrued and unpaid interest
      to the redemption date, if redeemed during the 12 month period beginning
      on June 1 of the years indicated:

                                                       REDEMPTION
                YEAR                                     PRICE

                2003                                    104.750%
                2004                                    103.167%
                2005                                    101.583%
                2006 and thereafter                     100.000%                      $     -           $     600,000

      $200,000 of the Company's senior subordinated debentures due December 15,
      2010, with interest payable semiannually at 8.875%. Debentures are
      redeemable, in whole or in part, at the option of the Company at any time
      on or after December 15, 2003, at the redemption prices (expressed as
      percentages of the principal amount thereof) set forth below together with
      accrued and unpaid interest to the redemption date, if redeemed during the
      12 month period beginning on December 15 of the years indicated:

                                                       REDEMPTION
                YEAR                                     PRICE

                2003                                    104.438%
                2004                                    103.328%
                2005                                    102.219%
                2006                                    101.109%
                2007 and thereafter                     100.000%                            -                 200,000

      Term loans                                                                            -                 512,500

      $125,000 of the Company's senior subordinated notes, due
      October 1, 2007 with interest payable semiannually at 8.5%                          125,000               -
</TABLE>


                                       43
<PAGE>   47
<TABLE>
<CAPTION>
                                                                         JANUARY 1,        DECEMBER 31,
                                                                            1998               1998
                                                                                 (IN THOUSANDS)
<S>                                                                     <C>                 <C>
      $250,000 of the Company's senior reducing revolving
      credit facility                                                       162,000                --

      Capital lease obligations, payable in monthly installments
      plus interest at 14%                                                     --                23,809

      Other                                                                   1,583               4,757
                                                                        -----------         -----------

                                                                            288,583           1,341,066

      Less current maturities                                                  (306)             (6,524)
                                                                        -----------         -----------

                                                                        $   288,277         $ 1,334,542
                                                                        ===========         ===========
</TABLE>

      CREDIT FACILITIES (IN THOUSANDS) - In connection with the Merger and
      Recapitalization (Note 1), the Company entered into credit facilities
      provided by a syndicate of financial institutions. In August and December
      1998, such credit facilities were amended. Such credit facilities (the
      "Credit Facilities") now include a $500,000 Revolving Credit Facility
      (including the availability of Revolving Loans, Swing Line Loans, and
      Letters of Credit) and three term loan facilities: Term A, Term B, and
      Term C (the "Term Loans"). The Company must pay an annual commitment fee
      ranging from 0.2% to 0.425%, depending on the Company's Total Leverage
      Ratio, as defined in the Credit Facilities, of the unused portion of the
      Revolving Credit Facility. The Revolving Credit Facility expires in June
      2005. At December 31, 1998, there were no outstanding borrowings under the
      Revolving Credit Facility.

      Borrowings under the Term A Loan or the Revolving Credit Facility can be
      made at the "Base Rate" plus a margin of 0% to 1%, or the "LIBOR Rate,"
      plus .625% to 2.25%, both depending on the Total Leverage Ratio. The Base
      Rate on revolving loans is the rate established by the Administrative
      Agent in New York as its base rate for dollars loaned in the United
      States. The LIBOR Rate is based on the LIBOR rate for the corresponding
      length of loan. The outstanding balance amounted to $240,000 at December
      31, 1998 and one percent of the outstanding balance on the Term A Loan is
      due annually through 2004 with the balance of the Term A Loan due in 2005.

      Borrowings under the Term B Loan can be made at the Base Rate plus a
      margin of 0.75% to 1.25% or the LIBOR Rate plus 2.0% to 2.5%, both
      depending on the Total Leverage Ratio. The outstanding balance amounted to
      $137,500 at December 31, 1998 and one percent of the outstanding balance
      is due annually through 2005, with the balance of the loan due in 2006.

      Borrowings under the Term C Loan can be made at the Base Rate plus a
      margin of 1.0% to 1.5% or the LIBOR Rate plus 2.25% to 2.75%, both
      depending on the Total Leverage Ratio. The outstanding balance amounted to
      $135,000 at December 31, 1998 and one percent of the outstanding balance
      is due annually through 2006, with the balance of the loan due in 2007.

      The Credit Facilities contain customary covenants and restrictions on the
      Company's ability to issue additional debt, pay dividends or engage in
      certain activities and include customary events of default. In addition,
      the Credit Facilities specify that the Company must meet or exceed defined
      interest coverage ratios and must not exceed defined leverage ratios.


                                       44
<PAGE>   48
      The Credit Facilities are collateralized by a pledge of the stock of the
      Company's domestic subsidiaries. The Company's payment obligations under
      the Credit Facilities are guaranteed by its direct and indirect U.S.
      subsidiaries.

      Under the Company's previous $250,000 senior reducing revolving credit
      facility (the "previous credit facility"), interest was payable quarterly
      at LIBOR plus .65%. The margin added to LIBOR was determined based upon
      certain financial ratios of the Company. The previous credit facility was
      repaid in conjunction with the Recapitalization.

      The Company's long term debt and capital lease obligations are scheduled
      to mature as follows (in thousands):

<TABLE>
<CAPTION>
                                              LONG-TERM                  CAPITAL LEASES                  TOTAL
                                                DEBT              INTEREST           PRINCIPAL         PRINCIPAL
<S>                                        <C>                   <C>                <C>             <C>
                      1999                 $      4,038          $   3,046          $   2,486       $      6,524
                      2000                        4,149              2,786              1,601              5,750
                      2001                        4,191              2,551              1,826              6,017
                      2002                        4,236              2,259              2,482              6,718
                      2003                        4,287              1,890              2,885              7,172
                Thereafter                    1,296,356              3,138             12,529          1,308,885
                                              ---------          ---------             ------          ---------

                                           $  1,317,257          $  15,670          $  23,809       $  1,341,066
                                           ============          =========          =========       ============
</TABLE>

      TENDER OFFER - In connection with the Recapitalization, the Company
      commenced a tender offer for all of the Company's 8.5% senior subordinated
      notes ("Regal Notes") and a consent solicitation in order to effect
      certain changes in the related indenture. Upon completion of the tender
      offer, holders had tendered and given consents with respect to 100% of the
      outstanding principal amount of the Regal Notes. In addition, the Company
      and the trustee executed a supplement to such indenture, effecting the
      proposed amendments which included, among other things, the elimination of
      all financial covenants for the Regal Notes. On May 27, 1998, the Company
      paid, for each $1,000 principal amount, $1,116.24 for the Regal Notes
      tendered plus, in each case, accrued and unpaid interest of $13.22. Regal
      financed the purchase price of the Regal Notes with funds from the
      Recapitalization.

      EXTRAORDINARY LOSS - An extraordinary loss of $11,890, net of income taxes
      of $7,601, was recognized for the write-off of deferred financing costs
      and prepayment penalties incurred in connection with redeeming the Regal
      Notes as well as for the write-off of deferred financing costs related to
      the Company's previous credit facility. Additionally, the Company
      refinanced debt of acquired companies, recognizing losses on
      extinguishment of debt of $751 and $10,020 (each, net of applicable income
      taxes) in 1996 and 1997, respectively. Such losses are reported as
      extraordinary losses in the accompanying financial statements.

6.    CAPITAL STOCK AND STOCK OPTION PLANS

      COMMON STOCK - Effective May 27, 1998, the Recapitalization date, the
      Company effected a stock split in the form of a stock dividend resulting
      in a price per share of $5.00, which $5.00 per share is equivalent to the
      $31.00 per share consideration paid in the Merger. The Company's common
      shares issued and outstanding throughout the accompanying financial
      statements and notes reflect the retroactive effect of the
      Recapitalization stock split. Additionally, the financial statements and
      notes reflect the retroactive effect of stock issued in connection with
      the poolings of interest

                                       45
<PAGE>   49
      transactions described in Note 3 and the authorization of additional
      shares and the effect of the 3-for-2 stock split authorized on September
      16, 1996.

      EARNINGS PER SHARE - Earnings per share information is not presented
      herein as the Company's shares do not trade in a public market.

      PREFERRED STOCK - The Company currently has 100,000,000 shares of
      preferred stock authorized with none issued. The Company may issue the
      preferred shares from time to time in such series having such designated
      preferences and rights, qualifications and limitations as the Board of
      Directors may determine.

      STOCK OPTION PLANS - Prior to the Recapitalization, the Company had three
      employee stock option plans under which certain employees were granted
      options to purchase shares of the Company's common stock. All such options
      issued under these plans became fully vested upon consummation of the
      Recapitalization, and all participants either received cash for the
      difference between the per share price inherent in the Recapitalization
      and the exercise price of their options, or retained their existing
      options. In addition, certain key members of management were issued
      options under a newly formed 1998 Stock Purchase and Option Plan for Key
      Employees of Regal Cinemas, Inc. (the "Plan").

      Under the Plan, the Board of Directors of the Company may award stock
      options to purchase up to 30,000,000 shares of the Company's common stock.
      Grants or awards under the Plan may take the form of purchased stock,
      restricted stock, incentive or nonqualified stock options or other types
      of rights as specified in the Plan.

<TABLE>
<CAPTION>
                                                                    WEIGHTED         OPTIONS
                                                                    AVERAGE       EXERCISABLE AT
                                                     SHARES      EXERCISE PRICE      YEAR END
<S>                                               <C>            <C>              <C>
      Under option at December 28, 1995            16,105,883         $1.37
      Options granted in 1996                       5,907,050         $4.04
      Options exercised in 1996                    (2,299,673)        $0.46
                                                  -----------

      Under option at January 2, 1997              19,713,260         $2.28            349,246
                                                                                   ===========
      Options granted in 1997                       6,057,400         $4.55
      Options exercised in 1997                      (698,139)        $0.88
      Options canceled in 1997                       (449,500)        $3.70
                                                  -----------         -----

      Under option at January 1, 1998              24,623,021         $2.86          3,574,945
                                                                                   ===========
      Options granted in 1998                      14,419,334         $4.34
      Options exercised in 1998                          --             --
      Options canceled or redeemed in 1998        (20,316,730)        $2.84
                                                  -----------

      Under option at December 31, 1998            18,725,625         $3.76          8,021,889
                                                  ===========         =====        ===========
</TABLE>


                                       46
<PAGE>   50
<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING                                        OPTIONS EXERCISABLE
      -------------------------------------------------------------------------      -----------------------------------
                                                     WEIGHTED       WEIGHTED                                 WEIGHTED
        RANGE OF            NUMBER                   AVERAGE        AVERAGE              NUMBER              AVERAGE
        EXERCISE          OUTSTANDING              CONTRACTUAL      EXERCISE          EXERCISABLE            EXERCISE
         PRICE            AT 12/31/98                 LIFE           PRICE            AT 12/31/98             PRICE
<S>   <C>                <C>                       <C>           <C>                 <C>                  <C>
       $.38-$.62           2,087,197                   5.5       $         0.49          2,087,197        $         0.49
      $1.58-$3.67          4,149,793                   6.6       $         2.11          4,149,793        $         2.11
      $4.03-$5.00         12,488,635                   9.2       $         4.86          1,784,899        $         4.08
                         -----------                                                 -------------

                         $18,725,625                                                 $   8,021,889
                         ===========                                                 =============
</TABLE>

      Prior to the Recapitalization, the Company also had the 1993 Outside
      Directors' Stock Option Plan (the "1993 Directors' Plan"). Directors'
      stock options for the purchase of 125,550 shares at an exercise price of
      $4.77 and 186,000 shares at an exercise price of $4.40 were granted during
      1996 and 1997, respectively. All such options became fully vested and were
      redeemed for cash at the date of the Recapitalization. In addition, the
      Company, prior to the Recapitalization, had issued warrants to purchase
      982,421 shares of the Company's common stock at an exercise price of $.20
      per share. The warrants were redeemed for cash at the date of the
      Recapitalization.

      Regal has elected to continue following Accounting Principles Board
      Opinion No. 25 Accounting for Stock Issued to Employees (APB 25) and
      related interpretations in accounting for its employee stock option plans
      and its outside directors' plan rather than the alternative fair value
      accounting provided for under FASB Statement 123, Accounting for
      Stock-Based Compensation (Statement 123). Under APB 25, because the
      exercise price of the Company's employee and director stock options equals
      the market price of the underlying stock on the date of grant, no
      compensation expense is recognized in the accompanying financial
      statements.

      Pro forma information regarding net income is required by Statement 123,
      and has been determined as if the Company has accounted for its stock
      options under the fair value method of that Statement. The fair value for
      the employee and directors options granted during fiscal years 1996, 1997
      and 1998, was estimated at the date of grant using a Black-Scholes option
      pricing model with the following weighted-average assumptions: risk-free
      interest rates ranging from 6.06% to 6.95% for 1996 grants, 5.9% to 6.68%
      for 1997 grants, and 5.0% to 5.9% for 1998 grants; volatility factors of
      the expected market price of the Company's common stock of 32.8% for 1996,
      33.7% for 1997, and an inconsequential volatility factor in 1998 due to
      the Company's Recapitalization (Note 1). The pricing model assumptions
      also included a weighted average expected life of 5 years for employee
      options and 7 years for outside director options. The weighted average
      grant date fair value of options granted in fiscal years 1996, 1997 and
      1998, was $1.67, $1.85 and $.96 per share, respectively.

      For purposes of pro forma disclosures, the estimated fair value of the
      options is amortized to expense over the options' vesting periods. The pro
      forma results do not purport to indicate the effects on reported net
      income for recognizing compensation expense which are expected to occur in
      future years. The Company's pro forma information for 1996, 1997, and 1998
      option grants is as follows:

<TABLE>
<CAPTION>
                                            1996           1997             1998
                                                     (IN THOUSANDS)
<S>                                      <C>             <C>             <C>
      Pro forma net income (loss)        $ 23,930        $ 22,883        $(59,423)
</TABLE>

                                       47
<PAGE>   51
      The 1998 pro forma net loss reflects an adjustment for the intrinsic value
      of the options redeemed at the Recapitalization date that were issued
      prior to the Company's adoption of the disclosure provisions of Statement
      123. Such options had intrinsic value prior to the Recapitalization date
      and therefore the value of these options has been excluded from the amount
      of compensation costs reflected in the 1998 proforma net loss.

7.    INCOME TAXES

      Deferred income taxes reflect the net tax effects of temporary differences
      between the carrying amounts of assets and liabilities for financial
      reporting purposes and the amounts used for income tax purposes.

      Significant components of the Company's net deferred tax asset (liability)
      consisted of the following at:

<TABLE>
<CAPTION>
                                                                    JANUARY 1,      DECEMBER 31,
                                                                       1998             1998
                                                                     --------         --------
                                                                           (IN THOUSANDS)
<S>                                                                  <C>              <C>
Deferred tax assets:
        Net operating loss carryforwards                             $  4,036         $ 25,766
        Excess of tax basis over book basis for leases                   --              5,032
        Accrued expenses                                                1,230            4,515
        Interest expense deferred under IRC 163(j)                       --              2,742
        Favorable leases                                                  488              524
        Noncompete                                                        342              439
        Operating leases                                                  524              388
        Excess of tax basis over book basis of certain assets            --                336
        AMT credit carryforward                                           627              162
        Other                                                           1,063            1,399
                                                                     --------         --------
                 Deferred tax assets                                    8,310           41,303

      Deferred tax liabilities:
        Excess of book basis over tax basis of certain assets         (16,313)            --
        Excess of book basis over tax basis of certain
          intangible assets                                              (805)          (1,709)
        Other                                                            (650)            (785)
                                                                     --------         --------
                 Deferred tax liabilities                             (17,768)          (2,494)
                                                                     --------         --------

      Net deferred tax asset (liability)                             $ (9,458)        $ 38,809
                                                                     ========         ========
</TABLE>

      The Company provided no valuation allowance against deferred tax assets
      recorded as of December 31, 1998 and January 1, 1998, as management
      believes that it is more likely than not that all deferred assets will be
      fully realizable in future tax periods. The $2,309,000 increase in the
      valuation allowance in 1996, and the corresponding decrease in 1997,
      primarily reflect the change in the assessment of the likelihood of
      utilization of net operating loss carryforwards of the Company and its
      subsidiaries.

      At December 31, 1998, the Company and certain of its subsidiaries have
      various federal and state net operating loss ("NOL") carryforwards
      available to offset future taxable income. The Company has approximately
      $66,500,000 of NOL carryforwards, in the aggregate, for federal purposes.
      Portions of the federal NOL are subject to utilization limitations.
      However, the deferred tax asset related to the federal NOL is expected to
      be fully realized as such losses do not begin expiring until the 2009 tax
      year.

                                       48

<PAGE>   52
      Furthermore, a substantial portion of the federal NOL does not expire
      until 2018. The Company also has NOL carryforwards for state purposes. The
      deferred tax asset related to the state NOL is expected to be fully
      realized as well. At December 31, 1998, the Company has approximately
      $162,000 alternative minimum tax credit carryforward available to reduce
      future federal income tax liabilities. Under current Federal income tax
      law, the alternative minimum tax credit can be carried forward
      indefinitely.

      The components of the provision (benefit) for income taxes for income from
      continuing operations for each of the three fiscal years were as follows:

<TABLE>
<CAPTION>
                                                 1996         1997          1998
                                                        (IN THOUSANDS)
<S>                                            <C>          <C>           <C>   
      Current                                  $ 16,718     $ 17,828      $   --
      Deferred                                    1,803        3,602       (22,170)
      Increase (decrease) in deferred
        income tax valuation allowance            2,309       (2,309)         --
                                               --------     --------      --------

      Total income tax provision (benefit)     $ 20,830     $ 19,121      $(22,170)
                                               ========     ========      ========
</TABLE>


      Extraordinary losses are presented net of related tax benefits. Therefore,
      the 1996 and 1997 income tax provision and the 1998 income tax benefit in
      the above table exclude tax benefits of $.5 million, $6.2 million and $7.6
      million, respectively, on extraordinary losses related to expenses
      incurred in the extinguishment of debt and the write-off of debt financing
      costs related to the debt.

      A reconciliation of the provision (benefit) for income taxes as reported
      and the amount computed by multiplying the income before income taxes and
      extraordinary item by the U.S. federal statutory rate of 35% was as
      follows:

<TABLE>
<CAPTION>
                                                                 1996          1997          1998
                                                                         (IN THOUSANDS)
<S>                                                            <C>          <C>           <C>      
      Provision (benefit) computed at federal statutory
        income tax rate                                        $ 16,244     $ 19,012      $(29,340)
      State and local income taxes, net of federal benefit        1,870        2,161        (2,425)
      Merger expenses - non deductible                              407          257         8,268
      Goodwill amortization                                        --           --           1,221
      Increase (decrease) in valuation allowance                  2,309       (2,309)         --
      Other                                                        --           --             106
                                                               --------     --------      --------

      Total income tax provision (benefit)                     $ 20,830     $ 19,121      $(22,170)
                                                               ========     ========      ========
</TABLE>


8.    COMMITMENTS AND CONTINGENCIES

      LEASES - Leases entered into by the Company, principally for theatres, are
      accounted for as operating leases. The Company, at its option, can renew a
      substantial portion of the leases at defined or then fair rental rates for
      various periods. Certain leases for Company theatres provide for
      contingent rentals based on revenues. Minimum rentals payable under all
      noncancelable operating leases with terms in excess of one year as of
      December 31, 1998, are summarized for the following fiscal years:


                                       49
<PAGE>   53
<TABLE>
<CAPTION>
      (IN THOUSANDS)

<S>                                                                   <C>       
       1999                                                           $  103,728
       2000                                                              103,221
       2001                                                              100,092
       2002                                                               98,384
       2003                                                               98,867
       Thereafter                                                      1,158,869
</TABLE>

      Rent expense under such operating leases amounted to $41,427, $52,632 and
      $80,923 for fiscal years 1996, 1997 and 1998, respectively.

      The Company has also entered into certain lease agreements for the
      operation of theatres not yet constructed. The scheduled completion of
      construction for these theatre openings are at various dates during fiscal
      1999 and 2000. As of December 31, 1998, the total future minimum rental
      payments under the terms of these leases approximate $1.9 billion to be
      paid over 15 to 20 years.

      CONTINGENCIES - From time to time, the Company is involved in legal
      proceedings arising in the ordinary course of its business operations,
      such as personal injury claims, employment matters and contractual
      disputes. Management believes that the Company's potential liability with
      respect to such proceedings is not material in the aggregate to the
      Company's consolidated financial position, results of operations or cash
      flows.

9.    RELATED PARTY TRANSACTIONS

      Prior to May 1996, Regal obtained film licenses through an independent
      film-booking agency owned by a director of the Company. Additionally, this
      director provided consulting services to the Company. The Company paid
      $655,000 in 1996 for booking fees and consulting services.

      Regal paid $952,000, $1,200,057 and $642,302 in 1996, 1997 and 1998,
      respectively, for legal services provided by a law firm, a member of which
      served as a director of the Company through May of 1998.

      Cobb Theatres leased office and warehouse facilities from a related party.
      The related rent expense amounted to approximately $509,000 and $187,000
      in 1996 and 1997, respectively.

      Cobb Theatres had an agreement with a corporation owned by a related
      party, to provide aircraft services. The fees for such services amounted
      to approximately $432,000 and $257,250 for 1996 and 1997, respectively.

      In connection with the Recapitalization, the Company entered into a
      management agreement with KKR and Hicks Muse pursuant to which the Company
      has paid approximately $1,093,000 of management fees during fiscal 1998.
      Additionally, the Recapitalization costs included in the accompanying 1998
      financial statement include an aggregate of $19.5 million of fees paid to
      KKR and Hicks Muse.


                                       50
<PAGE>   54
10.   CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                    January 2,      January 1,      December 31,
                                                      1997            1998             1998
                                                                 (IN THOUSANDS)
<S>                                                 <C>             <C>             <C>     
      Supplemental information on cash flows:
        Interest paid                               $ 12,027        $ 14,486        $ 59,745
        Less:  Interest capitalized                   (1,682)         (2,617)         (6,164)
                                                    --------        --------        --------

      Interest paid, net                            $ 10,345        $ 11,869        $ 53,581
                                                    ========        ========        ========

      Income taxes paid, net of refunds             $ 11,318        $ 10,001        $  4,656
                                                    ========        ========        ========
</TABLE>


      NONCASH TRANSACTIONS:

      1996:

      -     Regal issued 4,360,094 shares of Regal common stock as additional
            consideration for assets purchased from an individual and
            corporations controlled by him. The value of the common stock issued
            in the 1996 acquisition of approximately $14,100,000 was allocated
            to property and equipment and goodwill.

      -     Regal recognized income tax benefits relating to exercised stock
            options totaling $5,017,000.

      1997:

      -     Regal recognized income tax benefits relating to exercised stock
            options totaling $1,306,000.

      1998:

      -     Regal issued 60,383,388 shares of common stock and certain options
            to purchase shares of the Company's common stock valued at
            approximately $312,157,000 and assumed debt of approximately
            $411,337,000 as consideration for assets purchased from Act III
            (Note 3).

      -     Regal issued 808,313 shares of common stock valued at approximately
            $4.2 million in exchange for notes receivables from certain
            shareholders.

      -     In connection with the Recapitalization, 456,549 shares of common
            stock valued at approximately $2.2 million held by certain of the
            Company's senior management were reinvested in the Company.

11.   EMPLOYEE BENEFIT PLANS

      The Company sponsors employee benefit plans under section 401(k) of the
      Internal Revenue Code for the benefit of substantially all full-time
      employees. The Company made discretionary contributions of approximately
      $280,000, $291,000 and $319,000 to the plans in 1996, 1997 and 1998,
      respectively. All full-time employees are eligible to participate in the
      plans upon completion of twelve months of employment with 1,000 or more
      hours of service, subject to a minimum age of 21.

12.   FAIR VALUE OF FINANCIAL INSTRUMENTS

      The methods and assumptions used to estimate the fair value of each class
      of financial instrument are as follows:

      Cash and equivalents, accounts receivable, accounts payable: The carrying
      amounts approximate fair value because of the short maturity of these
      instruments.

      Long term debt, excluding capital lease obligations: The carrying amounts
      of the Company's term loans and the revolving credit facility approximate
      fair value because the interest rates are based on


                                       51
<PAGE>   55
      floating rates identified by reference to market rates. The fair values of
      the Company's senior subordinated notes and debentures and other debt
      obligations are estimated based on quoted market prices for the same or
      similar issues or on the current rates offered to the Company for debt of
      the same remaining maturities. The carrying amounts and fair values of
      long-term debt at January 1, 1998 and December 31, 1998 consists of the
      following:

<TABLE>
<CAPTION>
                             January 1,      December 31,
                                1998             1998
<S>                         <C>              <C>       
      Carrying amount       $  288,277       $1,317,257
      Fair value            $  289,529       $1,338,257
</TABLE>


      Interest rate swaps: As of January 1, 1998 and December 31, 1998 the
      Company had entered into interest rate swap agreements ranging from five
      to seven years for the management of interest rate exposure. As of January
      1, 1998 and December 31, 1998, such agreements had effectively converted
      $20 million and $270 million, respectively, of LIBOR floating rate debt to
      fixed rate obligations with interest rates ranging from 5.32% to 7.32%.
      Regal continually monitors its position and the credit rating of the
      interest swap counterparty. The fair values of interest rate swap
      agreements are estimated based on quotes from dealers of these instruments
      and represent the estimated amounts the Company would expect to (pay) or
      receive to terminate the agreements. The fair value of the Company's
      interest rate swap agreements at January 1, 1998 and December 31, 1998
      were $(955,000) and $(3,159,844), respectively.

                                   * * * * * *

                                       52
<PAGE>   56
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

         The Company engaged Deloitte & Touche LLP ("Deloitte & Touche") as its
new independent accountants as of September 9, 1998. Prior to such date, the
Company did not consult with Deloitte & Touche regarding (i) the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements or (ii) any matter that was either the subject of a disagreement (as
defined in paragraph 304(a)(1)(iv) and the related instructions to Item 304) or
a reportable event (as described in paragraph 304(a)(1)(v)).


                                       53
<PAGE>   57
                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The following persons are the current directors and executive officers
of the Company. Certain information relating to the directors and executive
officers, which has been furnished to the Company by the individuals named, is
set forth below.

<TABLE>
<CAPTION>
           NAME                    AGE                                       POSITION
---------------------------   --------------   --------------------------------------------------------------------
<S>                                 <C>        <C>
Michael L. Campbell                 45         Chairman, President, Chief Executive Officer and Director

Gregory W. Dunn                     39         Executive Vice President and Chief Operating Officer

Robert J. Del Moro                  39         Senior Vice President, Purchasing

Denise K. Gurin                     47         Senior Vice President, Head Film Buyer

J.E. Henry                          50         Senior Vice President, Chief Information Officer, Management Information
                                               Systems

Mike Levesque                       40         Senior Vice President, Operations

D. Mark Monroe                      36         Senior Vice President, Acting Chief Financial Officer and Treasurer

R. Keith Thompson                   37         Senior Vice President, Real Estate and Construction

Phillip J.  Zacheretti              39         Senior Vice President, Marketing and Advertising

David Deniger                       54         Director

Thomas O. Hicks                     53         Director

Henry R. Kravis                     55         Director

Michael J. Levitt                   40         Director

John R. Muse                        48         Director

Alexander Navab, Jr.                33         Director

Clifton S. Robbins                  40         Director

George R. Roberts                   56         Director
</TABLE>

         Michael L. Campbell founded the Company in November 1989 and has served
as Chairman of the Board, President and Chief Executive Officer since inception.
Prior thereto, Mr. Campbell was the Chief Executive Officer of Premiere Cinemas
Corporation ("Premiere"), which he co-founded in 1982, and served in such
capacity until Premiere was sold in October 1989. Mr. Campbell serves on the
Executive Committee of the Board of Directors of the National Association of
Theatre Owners.

         Gregory W. Dunn has served as Executive Vice President and Chief
Operating Officer since 1995. From 1991 to 1995, Mr. Dunn was Vice President,
Marketing and Concessions. From 1989 to 1991, Mr. Dunn was the Purchasing and
Operations Manager for Goodrich Quality Theaters, a Grand Rapids, Michigan based
theatre chain. From 1986 to 1989, he was a film buyer for Tri-State Theatre
Service, Inc.


                                       54
<PAGE>   58
         Robert J. Del Moro has served as Senior Vice President, Purchasing
since September of 1998. From 1997 to 1998, Mr. Del Moro was Vice President,
Food Service for the Company. From 1996 to 1997, Mr. Del Moro was Vice
President, Entertainment Centers and Food Service. From 1995 to 1996, Mr. Del
Moro was Vice President, Marketing and Concession. From 1994 to 1995, Mr. Del
Moro was Director, Theatre Promotions and Concession.

         Denise K. Gurin has served as Senior Vice President, Head Film Buyer
since September of 1998. From 1997 to 1998, Ms. Gurin was Vice-President, Head
Film Buyer. From 1995 to 1997, Ms. Gurin was Senior Vice President, Film and
Marketing for Mann Theatres, a Los Angeles, California based theatre chain
("Mann Theatres"). From 1992 to 1995, Ms. Gurin was a film buyer for Mann
Theatres.

         J.E. Henry has served as Senior Vice President, Chief Information
Officer, Management Information Systems since September of 1998. From 1996 to 
1998, Mr. Henry was Vice President, Management Information Systems. From 1994 
to 1996, Mr. Henry served as Director of Management Information Systems.

         Mike Levesque has served as Senior Vice President, Operations since
January of 1999. From 1996 to 1999, Mr. Levesque was Vice President, Operations 
- Northern Region. From 1995 to 1996, Mr. Levesque served as Director of 
Marketing. During 1995, Mr. Levesque was a District Manager for the Eastern 
Region, and from 1994 to 1995, Mr. Levesque was a theatre general manager.

         D. Mark Monroe is a certified public accountant and has served as
Senior Vice President and Acting Chief Financial Officer since October 1, 1998
and as Vice President and Treasurer since November 1997. From September 1995 to
October 1997, Mr. Monroe served as the Director of Accounting Projects. From
1992 to 1995, Mr. Monroe was a manager with Pershing, Yoakley and Associates, a
regional accounting and consulting firm. From 1986 to 1991, Mr. Monroe was with
Ernst & Young LLP.

         R. Keith Thompson has served as Senior Vice President, Real Estate and
Construction since February 1993. Prior thereto, he served as Vice President,
Finance since joining the Company in 1991. From June 1984 to July 1991, Mr.
Thompson was a Vice President of Corporate Lending at PNC Commercial
Corporation.

         Phillip J. Zacheretti has served as Senior Vice President, Marketing
and Advertising since August of 1998. During 1998, Mr. Zacheretti was Vice
President, Marketing and during 1997 Mr. Zacheritti was Director of Marketing.
From 1989 through 1996, Mr. Zacheretti was Director of Marketing for Cinemark
USA, Inc., a Plano, Texas based theatre chain.

         David Deniger became a director of the Company upon the closing of the
Regal Merger. Mr. Deniger is a Managing Director and principal of Hicks Muse.
Mr. Deniger is also General Partner, President and CEO of Olympus Real Estate
Corporation. Prior to forming Olympus Real Estate Corporation with Hicks Muse,
Mr. Deniger was a founder and served as President and Chief Executive Officer of
GE Capital Realty Group, Inc. ("GECRG"), a wholly owned subsidiary of General
Electric Capital Corporation ("GE Capital"), organized to underwrite, acquire
and manage real estate equity investments made by GE Capital and its
co-investors. Prior to forming GECRG, Mr. Deniger was President and CEO of FGB
Realty Advisors, a wholly owned subsidiary of MacAndrews & Forbes Financial
Service Group. Mr. Deniger also serves as a director of the Arnold Palmer Golf
Management Company, Olympus Real Estate Corporation and Park Plaza
International.

         Thomas O. Hicks became a director of the Company upon the closing of
the Regal Merger. Mr. Hicks has been Chairman and Chief Executive Officer of
Hicks Muse since co-founding the firm in 1989. Prior to forming Hicks Muse, Mr.
Hicks co-founded Hicks & Haas Incorporated in 1983 and served as its Co-Chairman
and Co-Chief Executive Officer through 1989. Mr. Hicks also serves as a director
of Capstar Broadcasting Corporation, CEI Citicorp Holdings, S.A., Chancellor
Media Corporation, Cooperative Computing, Inc., CorpGroup Limited, Group MVS,
S.A. de C.V., Home Interiors & Gifts, Inc., International Home Foods, Inc., LIN
Television Corporation, Neodata Services, Inc., Olympus Real Estate Corporation,
Sybron International Corporation, Triton Energy Limited and Viasystems Group,
Inc.

         Henry R. Kravis became a director of the Company upon the closing of
the Regal Merger. He is a managing member of the limited liability company which
serves as the general partner of KKR. He is also

                                       55
<PAGE>   59
a director of Accuride Corporation, Amphenol Corporation, Borden, Inc., The
Boyds Collection, Ltd., Bruno's, Inc., Evenflo & Spalding Holdings Corporation,
The Gillette Company, IDEX Corporation, KinderCare Learning Centers, Inc., KSL
Recreational Group, Inc., Newsquest Capital plc, Owens-Illinois, Inc.,
Owens-Illinois Group, Inc., PRIMEDIA, Inc., Randall's Food Markets, Inc., Reltec
Corporation, Safeway Inc., Sotheby's Holdings, Inc., Union Texas Petroleum
Holdings, Inc. and World Color Press, Inc.

         Michael J. Levitt became a director of the Company upon the closing of
the Regal Merger. Mr. Levitt is a Partner of Hicks Muse. Before joining Hicks
Muse, Mr. Levitt was a Managing Director and Deputy Head of Investment Banking
with Smith Barney Inc. from 1993 through 1995. From 1986 through 1993, Mr.
Levitt was with Morgan Stanley & Co. Incorporated, most recently as a Managing
Director responsible for the New York based Financial Enterpreneurs Group. Mr.
Levitt also serves as a director of Capstar Broadcasting Corporation, Chancellor
Media Corporation, Group MVS, S.A. de C.V., International Home Foods, Inc., LIN
Television Corporation and Sunrise Television Corp.

         John R. Muse became a director of the Company upon the closing of the
Regal Merger. Mr. Muse is Chief Operating Officer and co-founder of Hicks Muse.
Prior to the formation of Hicks Muse in 1989, Mr. Muse headed the
investment/merchant banking activities of Prudential Securities for the
southwestern region of the United States from 1984 to 1989. Prior to joining
Prudential Securities, Mr. Muse served as Senior Vice President and a director
of Schneider, Bernet & Hickman, Inc. in Dallas from 1979 to 1983 and was
responsible for the company's investment banking activities. Mr. Muse is a
director of Arena Brands Holding Corp, Arnold Palmer Golf Management Company,
Glass's Information Services, International Home Foods, Inc., LIN Television
Corporation, Lucchese, Inc., Olympus Real Estate Corporation, Suiza Foods
Corporation and Sunrise Television Corp.

         Alexander Navab, Jr. became a director of the Company upon the closing
of the Regal Merger. He has been an executive of KKR and a limited partner of
KKR Associates since 1993. From 1991 to 1993, Mr. Navab was an associate at
James D. Wolfensohn, Inc. He is also a director of Borden, Inc., KSL Recreation
Group, Inc., Newsquest Capital plc, Reltec Corporation and World Color Press,
Inc.

         Clifton S. Robbins became a director of the Company upon the closing of
the Regal Merger. He was a General Partner of KKR from January 1, 1995 until
January 1, 1996 when he became a member of the limited liability company which
serves as the general partner of KKR. Prior thereto, he was an executive
thereof. Mr. Robbins is a director of AEP Industries, Inc., Borden, Inc., IDEX
Corporation, KinderCare Learning Center, Inc. and Newsquest Capital plc.

         George R. Roberts became a director of the Company upon the closing of
the Regal Merger. He is a managing member of the limited liability company which
serves as the general partner of KKR. He is also a director of Accuride
Corporation, Amphenol Corporation, Borden, Inc., The Boyds Collection, Ltd.,
Bruno's, Inc., Evenflo & Spalding Holdings Corporation, IDEX Corporation,
KinderCare Learning Centers, Inc., KSL Recreation Group, Inc., Owens-Illinois,
Inc., Owens-Illinois Group, Inc., PRIMEDIA, Inc., Randall's Food Markets, Inc.,
Reltec Corporation, Safeway Inc., Union Texas Petroleum Holdings, Inc. and World
Color Press, Inc.

COMPOSITION OF THE BOARD OF DIRECTORS

         The Board of Directors of the Company consists of nine members,
including four directors designated by KKR and four directors designated by
Hicks Muse. Directors of the Company are elected annually by the stockholders to
serve during the ensuing year or until their respective successors are duly
elected and qualified.

                                       56
<PAGE>   60
ITEM 11.          EXECUTIVE COMPENSATION

         The following table provides information as to annual, long-term or
other compensation during the last three fiscal years for the Company's Chief
Executive Officer and the Company's four most highly compensated executive
officers who were serving as executive officers at the end of fiscal 1998 whose
salary and bonus exceeded $100,000 during fiscal 1998 and two individuals who
served as executive officers during fiscal 1998 whose salary and bonus exceeded
$100,000 during fiscal 1998 (collectively the "Named Executive Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                      LONG TERM
                                                                                                    COMPENSATION
                                                             ANNUAL COMPENSATION                       AWARDS
                                                 --------------------------------------------   ---------------------
                                                                                                     SECURITIES
                                                                                                     UNDERLYING
NAME AND POSITION                                 FISCAL YEAR     SALARY($)     BONUS($)(1)        OPTIONS/SARS(#)
                                                 -------------- -------------- --------------   ---------------------
<S>                                              <C>            <C>            <C>              <C>
Michael L. Campbell                                   1998       $     402,000   $    500,000               3,631,364
   Chairman, President and Chief Executive            1997             241,500        671,941                 190,000
   Officer                                            1996             209,463        716,988                 150,000
Gregory W. Dunn                                       1998       $     252,000   $    219,213                 413,255
  Executive Vice President and Chief Operating        1997             125,000        135,000                  60,000
  Officer                                             1996             115,358        130,000                  52,500
Lewis Frazer III (2)                                  1998       $     157,000   $         --                 470,484
  Executive Vice President, Chief Financial           1997             120,000        120,000                  60,000
  Officer and Secretary                               1996             108,413        124,950                  45,000
R. Keith Thompson                                     1998       $     145,000   $    101,175                 227,657
  Senior Vice President, Real Estate and              1997             110,000         70,000                  40,000
  Development                                         1996              95,568         60,000                  30,000
Robert J. Del Moro                                    1998       $     102,000   $     69,892                 146,063
  Senior Vice President, Purchasing                   1997              83,500         42,500                 180,997
                                                      1996              71,000         35,000                 139,500
J.E. Henry                                            1998       $      95,000   $     55,646                 148,343
  Senior Vice President, Chief Information Officer    1997              82,000         40,000                 155,000
  Management Information Systems                      1996              74,000         32,000                 139,500
Robert A. Engel (2)                                   1998       $      77,885   $     41,735                      --
  Senior Vice President Film and Advertising          1997              95,000         50,000                      --
                                                      1996              85,540         55,000                  30,000
</TABLE>

------------------

(1)  Reflects cash bonus earned in fiscal 1998, 1997 and 1996, respectively, and
     paid the following fiscal year.

(2)  As of October 1, 1998, Messrs. Frazer and Engel were no longer employed by
     the Company.


                                       57
<PAGE>   61
         The following table summarizes certain information regarding stock
options issued to the Named Executive Officers during fiscal 1998. No stock
appreciation rights ("SARs") have been granted by the Company.

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                              INDIVIDUAL GRANTS
                           --------------------------------------------------------
                                             PERCENT OF
                             NUMBER OF          TOTAL
                             SECURITIES        OPTIONS                                    POTENTIAL REALIZABLE
                             UNDERLYING      GRANTED TO                                     VALUE AT ASSUMED
                              OPTIONS         EMPLOYEES    EXERCISE                       ANNUAL RATES OF STOCK
                              GRANTED         IN FISCAL      PRICE      EXPIRATION          APPRECIATION FOR
           NAME                (#)(1)           1998       ($/SHARE)       DATE              OPTION TERM (2)
                                                                                     -------------------------------

                                                                                          5%($)          10%($)
                                                                                     --------------- ---------------
<S>                        <C>                 <C>            <C>         <C>        <C>              <C>
Michael L. Campbell        2,536,023(3)        23.62          $5.00       5/27/08     $   7,974,839   $    20,209,807
                           1,095,341(4)        10.20          $5.00       5/27/08         3,443,888         8,727,488

Gregory W. Dunn              309,941(3)         2.89          $5.00       5/27/08           974,602         2,469,833
                             103,314(4)         0.96          $5.00       5/27/08           324,867           823,277

Lewis Frazer III (5)         352,863(3)         3.29          $5.00       5/27/08                --                --
                             117,621(4)         1.09          $5.00       5/27/08                --                --

R. Keith Thompson            170,743(3)         1.59          $5.00       5/27/08           536,896         1,360,600
                              56,914(4)         0.53          $5.00       5/27/08           178,965           453,533

Robert J. Del Moro           109,547(3)         1.02          $5.00       5/27/08           344,468           872,950
                              36,516(4)         0.34          $5.00       5/27/08           114,823           290,984

J.E. Henry                   111,257(3)         1.04          $5.00       5/27/08           349,846           886,577
                              37,086(4)         0.34          $5.00       5/27/08           116,615           295,526

Robert A. Engel (5)               --           --             --             --                  --                --
</TABLE>
------------

(1)  All options were granted pursuant to the 1998 Stock Purchase and Option
     Plan for Key Employees of Regal Cinemas, Inc. Reflects 6.2 to 1 stock split
     effected on May 27, 1998 in connection with the Regal Merger.

(2)  Potential realizable value is calculated from a base stock price of $5.00
     per share, the exercise price of the options granted.

(3)  Options vest in 20% increments annually beginning one year after the date
     of grant.

(4)  Options vest after nine years or earlier if EBIT performance goals are
     achieved.

(5)  As of October 1, 1998, Messrs. Frazer and Engel were no longer employed by
     the Company and their respective options were canceled.


                                       58
<PAGE>   62
         The following table summarizes certain information with respect to
stock options exercised by the Named Executive Officers pursuant to the
Company's Stock Option Plans.

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                       FISCAL 1998 YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                              NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                                                                   UNDERLYING                 IN-THE-MONEY
                                                          UNEXERCISED OPTIONS HELD AT        OPTIONS HELD AT
                                                               DECEMBER 31, 1998          DECEMBER 31, 1998(1)
                                                                      (#)                          ($)
                                                          ---------------------------- ---------------------------
                             SHARES            NET
                          ACQUIRED ON         VALUE
NAME                      EXERCISE (#)     REALIZED($)     EXERCISABLE  UNEXERCISABLE   EXERCISABLE  UNEXERCISABLE
----------------------- ---------------- ---------------- ------------- -------------- ------------- -------------
<S>                     <C>              <C>              <C>           <C>            <C>           <C>
Michael L. Campbell         2,720,926 (2)   $6,850,522 (3)    1,911,801      3,631,364    $7,176,497           -0-
Gregory W. Dunn               863,597 (2)    1,879,628 (3)      498,654        413,255     1,878,087           -0-
Lewis Frazer III (4)        1,457,887 (5)    4,277,473 (6)           --             --            --            --
R. Keith Thompson             471,629 (2)    1,035,046 (3)      272,769        227,657     1,034,649           -0-
Robert J. Del Moro            380,110 (2)      657,776 (3)      207,068        146,063       663,480           -0-
J.E. Henry                    370,909 (2)      674,686 (3)      201,816        148,343       673,876           -0-
Robert A. Engel (4)           926,876 (2)   $3,074,086 (3)           --             --            --            --
</TABLE>

------------

(1)  Reflects the market value of the underlying securities at exercise, $5.00,
     minus the average exercise price.

(2)  These stock options were canceled in connection with the Regal Merger.

(3)  Reflects cash payments of $5.00 per share minus the exercise price paid in
     connection with the Regal Merger.

(4)  As of October 1, 1998, Messrs. Frazer and Engel were no longer employed by
     the Company.

(5)  Of these shares, 1,457,887 were canceled in connection with the Regal
     Merger and 470,484 were canceled as a result of Mr. Frazer's resignation.

(6)  Of this amount, 2,138,908 reflects cash payments of $5.00 per share minus
     the exercise price paid in connection with the Regal Merger and 2,138,565
     reflects cash payments of $5.00 per share minus the exercise price paid in
     connection with Mr. Frazer's resignation.

DIRECTORS' COMPENSATION

         Each director of the Company who is not also an officer or employee of
the Company receives a fee of $40,000 per year. Directors of the Company are
entitled to reimbursement of their reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of the Board of
Directors of the Company or committees thereof.

EMPLOYMENT AGREEMENTS

         The Company has entered into employment agreements with Messrs.
Campbell and Dunn pursuant to which they respectively serve as Chief Executive
Officer and Chief Operating Officer of the Company. The terms of the employment
agreements commenced upon the closing of the Regal Merger and continue for three
years. The employment agreements provide for initial base salaries of $500,000
and $325,000 per year for Messrs. Campbell and Dunn, respectively. Messrs.
Campbell and Dunn are entitled to receive


                                       59
<PAGE>   63
annual target bonuses of 140% and 100%, respectively, of their base salaries
based upon the achievement by the Company of certain EBITDA and other
performance targets set by the Board of Directors of the Company. The employment
agreements also provide that the Company will supply Messrs. Campbell and Dunn
with other customary benefits generally made available to other senior
executives of the Company. Each of the employment agreements also contains a
noncompetition and no-raid provision pursuant to which each of Messrs. Campbell
and Dunn has agreed, subject to certain exceptions, that during the term of his
employment agreement and for one year thereafter, he will not compete with the
Company or its theatre affiliates and will not solicit or hire certain employees
of the Company. Each of the employment agreements also contains severance
provisions providing for the termination of employment of Messrs. Campbell and
Dunn by the Company under certain circumstances in which Messrs. Campbell and
Dunn will be entitled to receive severance payments equal to the greater of (i)
two times their respective annual base salaries and (ii) the balance of their
respective base salaries over the then-remaining employment term, in either case
payable over 24 months (or if longer, the remaining balance of the employment
term) and continuation of health, life, disability and other similar welfare
plan benefits.

SETTLEMENT AGREEMENT

         Under the terms of a Settlement Agreement and General Release between
the Company and Lewis Frazer III, the Company's former Executive Vice President,
Chief Financial Officer and Secretary, the Company paid to Mr. Frazer in a lump
sum $2,138,565. In consideration for this payment, Mr. Frazer's options were
canceled and his shares of Common Stock were purchased by the Company. In
addition, Mr. Frazer and the Company executed mutual releases and Mr. Frazer
agreed, subject to certain exceptions, not to disclose any confidential
information obtained by him while employed by the Company and not to compete
with the Company for a one-year period.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         During fiscal 1998, the Compensation Committee was comprised of Messrs.
Levitt, Muse, Navab and Robbins. None of these persons has at any time been an
officer or employee of the Company or its subsidiaries.


                                       60
<PAGE>   64
ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth information with respect to the
beneficial ownership of shares of the Common Stock as of March 29, 1999, by (i)
each person who is known to the Company to own beneficially more than 5% of the
Common Stock; (ii) each director of the Company; (iii) the Named Executive
Officers of the Company; and (iv) all directors and executive officers of the
Company as a group. Unless noted otherwise, the address for each executive
officer is in the care of the Company at 7132 Commercial Park Drive, Knoxville,
Tennessee 37918.

<TABLE>
<CAPTION>
                                                                          Amount and
                    Name and Address of                              Nature of Beneficial                  Percent
                     Beneficial Owners                                   Ownership(1)                      of Class
----------------------------------------------------------      ------------------------------        ------------------
<S>                                                             <C>                                   <C>
5% STOCKHOLDERS:     
Hicks Muse Parties (2)                                                  100,000,000                          46.3%
         c/o Hicks, Muse, Tate & Furst Incorporated
         200 Crescent Court
         Suite 1600
         Dallas, Texas 75201

KKR 1996 GP L.L.C. (3)                                                  100,000,000                          46.3%
         c/o Kohlberg Kravis Roberts & Co. L.P.
         9 West 57th Street
         Suite 4200
         New York, New York 10019

OFFICERS AND DIRECTORS:
David Deniger                                                                    --                           *
Thomas O. Hicks                                                                  --                           *
Henry R. Kravis                                                                  --                           *
Michael J. Levitt                                                                --                           *
John R. Muse                                                                     --                           *
Alexander Navab, Jr.                                                             --                           *
Clifton S. Robbins                                                               --                           *
George R. Roberts                                                                --                           *
Michael L. Campbell                                                       2,368,350                           1.1%
Gregory W. Dunn                                                             498,654                           *
Robert J. Del Moro                                                               --                           *
J.E. Henry                                                                       --                           *
Lewis Frazer III                                                                 --                           *
Robert A. Engel, Jr.                                                             --                           *
R. Keith Thompson                                                           272,769                           *
All directors and executive officers as a group                           3,227,620                           1.5%
(15 persons)
</TABLE>

------------------------
*Indicates ownership of less than one percent of the Company's outstanding
Common Stock.

(1)  Pursuant to the rules of the Securities and Exchange Commission, certain
     shares of the Company's Common Stock which a beneficial owner has the right
     to acquire within 60 days of March 29, 1999 pursuant to the exercise of
     stock options or warrants are deemed to be outstanding for the purpose of
     computing the percentage ownership of such owner but are not deemed
     outstanding for the purpose of computing the percentage ownership of any
     other person.

(2)  Includes shares owned of record by Regal Equity Partners, L.P. ("Regal
     Partners"), a limited partnership whose sole general partner is TOH/Ranger,
     LLC ("Ranger LLC"). Mr. Hicks is the sole member and director of Ranger LLC
     and, accordingly, may be deemed to be the beneficial owner of the Common
     Stock held directly or indirectly by Regal Partners. John R. Muse, Charles
     W. Tate, Jack D. Furst, Lawrence D. Stuart, Jr. and Michael J. Levitt are
     officers of Ranger LLC and as such may be deemed to share with Mr. Hicks
     the power to vote or dispose of the Common Stock held by Regal Partners.
     Each of Messrs. Hicks, Muse, Tate, Furst, Stuart and Levitt disclaims
     beneficial ownership of the Common Stock not respectively owned of record
     by him.

                                       61
<PAGE>   65
(3)  KKR 1996 GP L.L.C. is the sole general partner of KKR Associates 1996 L.P.
     KKR Associates 1996 L.P., a limited partnership, is the sole general
     partner of KKR 1996 Fund L.P., a limited partnership formed at the
     direction of KKR, and possesses sole voting and investment power with
     respect to such shares. KKR 1996 GP L.L.C. is a limited liability company,
     the managing members of which are Henry R. Kravis and George R. Roberts,
     and the other members of which are Robert I. MacDowell, Paul E. Raether,
     Michael W. Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry
     Golkin, Clifton S. Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs.
     Kravis, Roberts and Robbins are directors of the Company. Mr. Alexander
     Navab, Jr. is a limited partner of KKR Associates 1996 L.P. and is also a
     director of the Company. Each of such individuals may be deemed to share
     beneficial ownership of the shares shown as beneficially owned by KKR 1996
     GP L.L.C. Each of such individuals disclaims beneficial ownership of such
     shares.


ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The following is a summary description of the principal terms of the
following agreements and is subject to and qualified in its entirety by
reference to the full text of such agreements, which are filed as exhibits to
this Form 10-K.

KKR/HICKS MUSE STOCKHOLDERS AGREEMENT

         Concurrently with the consummation of the Regal Merger, the Company
entered into a stockholder agreement with Hicks Muse and KKR (the "KKR/Hicks
Muse Stockholders Agreement"). Among other things, the KKR/Hicks Muse
Stockholders Agreement provides that each of Hicks Muse and KKR has the right to
appoint an equal number of directors to the Board of Directors of the Company,
subject to maintaining specified ownership thresholds. The number of directors
appointed by KKR and Hicks Muse together shall constitute a majority of the
Board of Directors. The KKR/Hicks Muse Stockholders Agreement further provides
that Hicks Muse and KKR will amend the Company's bylaws to provide that no
action may be validly taken at a meeting of the Board of Directors unless a
majority of the Board of Directors, a majority of the directors designated by
Hicks Muse and a majority of the directors designated by KKR have approved such
action.

         The KKR/Hicks Muse Stockholders Agreement provides that neither Hicks
Muse nor KKR may transfer its shares of Common Stock to a person other than its
respective affiliates for a period of five years following the closing date of
the Regal Merger. In addition, the KKR/Hicks Muse Stockholders Agreement
provides KKR and Hicks Muse with certain registration rights and limits the
ability of either KKR or Hicks Muse to separately acquire motion picture
exhibition assets in excess of a specified amount without first offering the
other the right to participate in such acquisition opportunity.

DLJ STOCKHOLDERS AGREEMENT

         Concurrently with the consummation of the Regal Merger, the Company,
Hicks Muse, KKR and DLJ entered into a stockholders agreement (the "DLJ
Stockholders Agreement"). Under the DLJ Stockholders Agreement, DLJ has the
right to participate pro rata in certain sales of Common Stock by KKR and Hicks
Muse, and KKR and Hicks Muse have the right to require DLJ to participate pro
rata in certain sales by KKR and Hicks Muse. The DLJ Stockholders Agreement also
grants DLJ stockholders certain registration and preemptive rights.

                                       62
<PAGE>   66
CERTAIN FEES

         Each of KKR and Hicks Muse received a fee for negotiating the
Recapitalization and arranging the financing therefor, plus the reimbursement of
their respective expenses in connection therewith, and from time to time, each
of KKR and Hicks Muse may receive customary investment banking fees for services
rendered to the Company in connection with divestitures, acquisitions and
certain other transactions. In addition, KKR and Hicks Muse have agreed to
render management, consulting and financial services to the Company for an
aggregate annual fee of $1.0 million.


                                       63
<PAGE>   67
                                     PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
                  FORM 8-K.

(a)      1.       Financial Statements:

                           The following Financial Statements of Regal Cinemas,
                           Inc. are included in Part II, Item 8.

                           Report of Independent Auditors 
                           Report of Coopers & Lybrand L.L.P., Independent 
                                    Accountants
                           Report of Ernst & Young LLP, Independent Auditors
                           Consolidated Balance Sheets at January 1, 1998 and
                                    December 31, 1998.
                           Consolidated Statements of Operations for the years
                                    ended January 2, 1997, January 1, 1998 and
                                    December 31, 1998.
                           Consolidated Statements of Changes in Shareholders'
                                    Equity for the years ended January 2, 1997,
                                    January 1, 1998 and December 31, 1998.
                           Consolidated Statements of Cash Flows for the years
                                    ended January 2, 1997, January 1, 1998 and
                                    December 31, 1998.
                           Notes to Consolidated Financial Statements


         2.       Financial Statement Schedules - Not applicable.

         3.       Exhibits:

<TABLE>
<CAPTION>
Exhibit
Number                 Description
-----------------      ---------------------------------------------------------
<S>                    <C>
2.1                   --   Agreement and Plan of Merger, dated as of January 19,
                           1998, by and among Regal Cinemas, Inc., Screen
                           Acquisition Corp. and Monarch Acquisition Corp. (1)

2.2                   --   Agreement and Plan of Merger, dated as of August 20,
                           1998, by and among Regal Cinemas, Inc., Knoxville
                           Acquisition Corp. and Act III Cinemas, Inc. (2)

3.1                   --   Amended and Restated Charter of the Registrant. (3)

3.2                   --   Restated Bylaws of the Registrant. (4)

4.1                   --   Specimen Common Stock certificate. (4)

4.2                   --   Article 5 of the Registrant's Amended and Restated
                           Charter (included in the Amended and Restated Charter
                           filed as Exhibit 3.1 hereto).

4.3                   --   Indenture, dated as of May 27, 1998, by and between
                           Regal Cinemas, Inc. and IBJ Whitehall Bank & Trust
                           Company (formerly IBJ Schroder Bank & Trust Company).
                           (5)

4.4                   --   Form of Regal Cinemas, Inc. 9 1/2% Senior
                           Subordinated Note due June 1, 2008 (contained in
                           Indenture filed as Exhibit 4.3 hereto).

4.5                   --   Indenture, dated as of December 16, 1998, by and
                           between Regal Cinemas, Inc. and IBJ Whitehall Bank &
                           Trust Company (IBJ Schroder Bank & Trust Company).
                           (6)

4.6                    --  Form of Regal Cinemas, Inc. 8 7/8% Senior
                           Subordinated Debenture due December 15, 2010
                           (contained in the Indenture filed as Exhibit 4.5
                           hereto).

10.1                   --  Employment Agreement, dated as of May 27, 1998, by
                           and between Regal Cinemas, Inc. and Michael L.
                           Campbell. (5)
</TABLE>

                                       64
<PAGE>   68
<TABLE>
<S>                   <C>
10.2                  --   Employment Agreement, dated as of May 27, 1998, by
                           and between Regal Cinemas, Inc. and Gregory W. Dunn.
                           (5)

10.3                  --   Severance Agreement and General Release, dated as of
                           September 30, 1998, by and between Regal Cinemas,
                           Inc. and Lewis Frazer III.*

10.4                  --   Credit Agreement, dated as of May 27, 1998, by and
                           between Regal Cinemas, Inc., its subsidiaries and the
                           lenders named therein. (5)

10.4-1                --   First Amendment, dated as of August 26, 1998, by and
                           between Regal Cinemas, Inc., its subsidiaries and the
                           lenders named therein. (3)

10.4-2                --   Second Amendment, dated as of December 31, 1998, by
                           and between Regal Cinemas, Inc., its subsidiaries and
                           the lenders named therein. (7)

10.5                  --   1993 Employee Stock Incentive Plan. (4)

10.6                  --   Regal Cinemas, Inc. Participant Stock Option Plan. (4)

10.7                  --   Regal Cinemas, Inc. Employee Stock Option Plan. (4)

10.8                  --   1998 Stock Purchase and Option Plan for Key Employees
                           of Regal Cinemas, Inc. (8)

10.9                  --   Form of Management Stockholder's Agreement. (8)

10.10                 --   Form of Non-Qualified Stock Option Agreement. (8)

10.11                 --   Form of Sale Participation Agreement. (8)

10.12                 --   Form of Registration Rights Agreement. (8)

10.13                 --   Stockholders' Agreement, dated as of May 27, 1998, by
                           and among Regal Cinemas, Inc., KKR 1996 Fund, L.P.,
                           KKR Partners II, L.P. and Regal Equity Partners, L.P.
                           (3)

10.14                 --   Stockholders' and Registration Rights Agreement,
                           dated as of May 27, 1998, by and among Regal Cinemas,
                           Inc., KKR 1996 Fund, L.P., KKR Partners II, L.P.,
                           Regal Equity Partners, L.P. and the DLJ signatories
                           thereto. (3)

21                    --   Subsidiaries.*

23.1                  --   Consent of Deloitte & Touche LLP. *

23.2                  --   Consent of PricewaterhouseCoopers LLP.*

23.3                  --   Consent of Ernst & Young LLP. *

27                    --   Financial Data Schedule (for SEC use only).*
</TABLE>

-----------------

* Filed herewith.

(1)  Incorporated by reference to the Registrant's Current Report on Form 8-K
     dated January 20, 1998.

(2)  Incorporated by reference to the Registrant's Current Report on Form 8-K
     dated September 1, 1998.

(3)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-4, Registration No. 333-64399.

(4)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-1, Registration No. 33-62868.

(5)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended July 2, 1998.

(6)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-4, Registration No. 333-69943.

(7)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-4/A, Registration No. 333-69931.

(8)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-8, Registration No. 333-52943.


         (b) During the fourth quarter of fiscal 1998 ended December 31, 1998,
the Registrant filed a Current Report on Form 8-K/A on September 23, 1998,
reporting changes in the Registrant's Certifying Accountant.

                                       65
<PAGE>   69
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                               REGAL CINEMAS, INC.

Dated: March 31, 1999                   By: /s/ Michael L. Campbell
                                           ------------------------
                                           Michael L. Campbell, Chairman,
                                           President, Chief Executive Officer
                                             and Director

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                                      Title                                    Date
---------                                      -----                                    ----
<S>                                            <C>                                      <C>
/s/ Michael L. Campbell                        Chairman of the Board,                   March 31, 1999
Michael L. Campbell                               President, Chief Executive
                                                  Officer and Director (Principal
                                                  Executive Officer)

/s/ D. Mark Monroe                             Senior Vice President, Acting            March 31, 1999
D. Mark Monroe                                    Chief Financial Officer and
                                                  Treasurer (Principal Financial
                                                  and Accounting Officer)

/s/ David Deniger                              Director                                 March 31, 1999
David Deniger

/s/ Thomas O. Hicks                            Director                                 March 31, 1999
Thomas O. Hicks

/s/ Henry R. Kravis                            Director                                 March 31, 1999
Henry R. Kravis

/s/ Michael J. Levitt                          Director                                 March 31, 1999
Michael J. Levitt

/s/ John R. Muse                               Director                                 March 31, 1999
John R. Muse

/s/ Alexander Navab, Jr.                       Director                                 March 31, 1999
Alexander Navab, Jr.

/s/ Clifton S. Robbins                         Director                                 March 31, 1999
Clifton S. Robbins

/s/ George R. Roberts                          Director                                 March 31, 1999
George R. Roberts
</TABLE>

                                       66
<PAGE>   70
    SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.

    No annual report or proxy material has been sent to security holders.

                                       67
<PAGE>   71
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number                 Description
-----------------      ---------------------------------------------------------
<S>                    <C>

2.1                    --  Agreement and Plan of Merger, dated as of January 19,
                           1998, by and among Regal Cinemas, Inc., Screen
                           Acquisition Corp. and Monarch Acquisition Corp. (1)

2.2                   --   Agreement and Plan of Merger, dated as of August 20,
                           1998, by and among Regal Cinemas, Inc., Knoxville
                           Acquisition Corp. and Act III Cinemas, Inc. (2)

3.1                   --   Amended and Restated Charter of the Registrant. (3)

3.2                   --   Restated Bylaws of the Registrant. (4)

4.1                   --   Specimen Common Stock certificate. (4)

4.2                   --   Article 5 of the Registrant's Amended and Restated
                           Charter (included in the Amended and Restated Charter
                           filed as Exhibit 3.1 hereto).

4.3                   --   Indenture, dated as of May 27, 1998, by and between
                           Regal Cinemas, Inc. and IBJ Whitehall Bank & Trust
                           Company (formerly IBJ Schroder Bank & Trust Company).
                           (5)

4.4                   --   Form of Regal Cinemas, Inc. 9 1/2% Senior
                           Subordinated Note due June 1, 2008 (contained in
                           Indenture filed as Exhibit 4.3 hereto).

4.5                   --   Indenture, dated as of December 16, 1998, by and
                           between Regal Cinemas, Inc. and IBJ Whitehall Bank &
                           Trust Company (IBJ Schroder Bank & Trust Company).
                           (6)

4.6                   --   Form of Regal Cinemas, Inc. 8 7/8% Senior
                           Subordinated Debenture due December 15, 2010
                           (contained in the Indenture filed as Exhibit 4.5
                           hereto).

10.1                  --   Employment Agreement, dated as of May 27, 1998, by
                           and between Regal Cinemas, Inc. and Michael L.
                           Campbell. (5)

10.2                  --   Employment Agreement, dated as of May 27, 1998, by
                           and between Regal Cinemas, Inc. and Gregory W. Dunn.
                           (5)

10.3                  --   Severance Agreement and General Release, dated as of
                           September 30, 1998, by and between Regal Cinemas,
                           Inc. and Lewis Frazer III.*

10.4                  --   Credit Agreement, dated as of May 27, 1998, by and
                           between Regal Cinemas, Inc., its subsidiaries and the
                           lenders named therein. (5)

10.4-1                 --  First Amendment, dated as of August 26, 1998, by and
                           between Regal Cinemas, Inc., its subsidiaries and the
                           lenders named therein. (3)

10.4-2                 --  Second Amendment, dated as of December 31, 1998, by
                           and between Regal Cinemas, Inc., its subsidiaries and
                           the lenders named therein. (7)

10.5                   --  1993 Employee Stock Incentive Plan. (4)

10.6                   --  Regal Cinemas, Inc. Participant Stock Option Plan.(4)

10.7                   --  Regal Cinemas, Inc. Employee Stock Option Plan. (4)

10.8                   --  1998 Stock Purchase and Option Plan for Key Employees
                           of Regal Cinemas, Inc. (8)

10.9                   --  Form of Management Stockholder's Agreement. (8)

10.10                  --  Form of Non-Qualified Stock Option Agreement. (8)

10.11                  --  Form of Sale Participation Agreement. (8)

10.12                  --  Form of Registration Rights Agreement. (8)

10.13                  --  Stockholders' Agreement, dated as of May 27, 1998, by
                           and among Regal Cinemas, Inc., KKR 1996 Fund, L.P.,
                           KKR Partners II, L.P. and Regal Equity Partners, L.P.
                           (3)
</TABLE>

                                       68
<PAGE>   72
<TABLE>
<S>                   <C>
10.14                 --   Stockholders' and Registration Rights Agreement,
                           dated as of May 27, 1998, by and among Regal Cinemas,
                           Inc., KKR 1996 Fund, L.P., KKR Partners II, L.P.,
                           Regal Equity Partners, L.P. and the DLJ signatories
                           thereto. (3)

21                    --   Subsidiaries.*

23.1                  --   Consent of Deloitte & Touche LLP. *

23.2                  --   Consent of PricewaterhouseCoopers LLP.*

23.3                  --   Consent of Ernst & Young LLP. *

27                    --   Financial Data Schedule (for SEC use only).*
</TABLE>

-----------------

* Filed herewith.

(1)  Incorporated by reference to the Registrant's Current Report on Form 8-K
     dated January 20, 1998.

(2)  Incorporated by reference to the Registrant's Current Report on Form 8-K
     dated September 1, 1998.

(3)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-4, Registration No. 333-64399.

(4)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-1, Registration No. 33-62868.

(5)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended July 2, 1998.

(6)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-4, Registration No. 333-69943.

(7)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-4/A, Registration No. 333-69931.

(8)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-8, Registration No. 333-52943.

                                       69