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

                                    FORM 10-K
                  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 NOS.    
                                                                        


                       SILVER CINEMAS INTERNATIONAL, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            DELAWARE                                           72-2656147
 (STATE OR OTHER JURISDICTION                                (I.R.S. EMPLOYER
 OF INCORPORATION OR ORGANIZATION)                           IDENTIFICATION NO.)

           4004 BELTLINE ROAD
              SUITE 205
            ADDISON, TEXAS                                     75001-4363
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                       (ZIP CODE)

       Registrant's Telephone Number, including area code: (972) 503-9851

          Securities Registered pursuant to Section 12(b) of the Act:

                                      NONE
                                (TITLE OF CLASS)

          Securities Registered pursuant to Section 12(g) of the Act:

                                      NONE
                                (TITLE OF CLASS)

         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 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.

         As of March 22, 1999, 137,708 shares of Common Stock were outstanding.



<PAGE>   2


                                      INDEX




<TABLE>
<S>   <C>        <C>   <C>                                                                             
PART I..................................................................................................
      Item 1:    Business...............................................................................
                 (a)   General Development of Business..................................................
                 (b)   Financial Information About Industry Segments....................................
                 (c)   Narrative Description of Business................................................
      Item 2:    Properties.............................................................................
      Item 3:    Legal Proceedings......................................................................
      Item 4:    Submission of Matters to a Vote of Security Holders....................................

PART II.................................................................................................
      Item 5:    Market for Registrant's Common Equity and Related Stockholder Matters..................
      Item 6:    Selected Financial Data................................................................
      Item 7:    Management's Discussion and Analysis of Financial Condition and Results of Operation...
      Item 8:    Financial Statements and Supplementary Data............................................
      Item 9:    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...

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

PART IV.................................................................................................
      Item 14:   Exhibits, Financial Statement Schedules and Reports on Form 8-K........................
                 (a)   Documents filed as part of this Report ..........................................
                 (b)   Reports on Form 8-K..............................................................
                 (c)   Exhibits.........................................................................
                 (c)   Financial Statement Schedules....................................................
</TABLE>



<PAGE>   3

                                     PART I

ITEM 1.  BUSINESS

(a)      GENERAL DEVELOPMENT OF BUSINESS

         Silver Cinemas International, Inc., a Delaware corporation (the
"Company"), was formed in May 1996 and operates in two segments as the largest
exhibitor of specialty motion pictures and one of the largest operators of
second-run theaters in the United States. The Company has four wholly owned
subsidiaries, Landmark Theatre Corp, Landmark Theatre Corp. USA and Dinger Bros.
Inc. (collectively referred to as "Landmark") and Silver Cinemas, Inc. ("Silver
Cinemas"), (Landmark and Silver Cinemas are collectively referred to as the
"Company"). Landmark operates 52 specialty motion picture theaters (156 screens)
and Silver Cinemas operates 43 second-run theaters (309 screens) and 11
first-run theaters (73 screens). At March 22, 1999, the Company operated 106
theaters with 538 screens located in nineteen states.

         The Company's strategy is to acquire theaters in under-served markets,
to upgrade and expand theaters to provide a high-quality movie-going experience
and to improve the profitability of theaters by combining certain administrative
functions, obtaining volume discounts and implementing tighter operating
controls.

FORWARD-LOOKING STATEMENTS OR INFORMATION

         This Form 10-K includes certain statements that are forward-looking
statements. Statements included or incorporated by reference in this Form 10-K
which address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including such things as future
capital expenditures (including the amount and nature thereof), expansion and
other development trends of industry segments in which the Company is active,
business strategy, expansion and growth of the Company's business and operations
and other such matters are forward-looking statements. Although the Company
believes it has made reasonable assumptions within the bounds of its knowledge
of its business, a number of factors could cause actual results to differ
materially from those expressed in any forward-looking statements. Many of these
factors have previously been identified in filings or statements made by or on
behalf of the Company.

         All phases of the Company's operations are subject to influence outside
its control. Any one, or a combination, of these factors could materially affect
the results of the Company's operations. These factors include: competitive
pressures, inflation, consumer spending trends and habits, laws and regulations
affecting labor and employee benefit costs, interest rate fluctuations and other
capital market conditions. Forward-looking statements made by or on behalf of
the Company are based on a knowledge of its business and the environment in
which it operates, but because of the factors listed above, actual results may
differ from those in the forward-looking statements. Consequently, all of the
forward-looking statements made are qualified by these and other cautionary
statements and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected consequences to or effects on the Company or
its business or operations.

ACQUISITIONS

         During 1998, the Company continued the expansion of its business with
the acquisition of 81 theaters (372 screens) and the construction of three
theaters (18 screens). The Company anticipates that its future growth will come
primarily through the development of new specialty motion picture theaters and
selected strategic acquisitions.

         In December 1997, the Company entered into a definitive agreement (the
"Landmark Asset Purchase Agreement") with Metromedia International Group, Inc.
("Metromedia") to acquire the assets of 



<PAGE>   4

Landmark. On April 17, 1998, the Company acquired the assets of The Landmark
Theatre Group for cash consideration of approximately $62.5 million. Landmark,
with 140 screens at 49 locations, is the largest exhibitor of specialty motion
pictures in the United States, with theaters located in California, Colorado,
Louisiana, Massachusetts, Missouri, Michigan, Minnesota, Ohio, Texas, Washington
and Wisconsin.

         In January 1998, the Company entered into a definitive agreement (the
"StarTime Asset Purchase Agreement") with StarTime Cinema, Inc. ("StarTime") to
acquire 202 screens at 27 locations operating predominately under the name Super
Saver Cinemas. On April 2, 1998, the Company completed the acquisition for
approximately $22.3 million. The theaters acquired from StarTime Cinema, Inc.
are second-run theaters located in Arizona, California, Colorado, Florida,
Nebraska, New York, Ohio, Oklahoma, Texas and Wisconsin.

         In March 1998, the Company entered into agreements with AMC
Entertainment, Inc. ("AMC") to acquire 17 screens at three theaters for
approximately $1.6 million. These theaters include one specialty-film theater in
Michigan and two second-run theaters in Texas. Pursuant to the AMC Acquisition,
the Company purchased one of these theaters in Texas in February 1998 and
another in March 1998 and the theater in Michigan in April 1998.

         In May 1998, the Company purchased one theater with twelve screens out
of bankruptcy for approximately $3.5 million. The second-run theater, located in
El Paso, Texas was previously owned by Movies One, Inc.

         In June 1998, the Company entered into a management agreement whereby
it manages the operations of the single-screen theater located in California for
a fixed monthly fee.

         In November 1998 the Company entered into a Stock Purchase Agreement
with Dinger Brothers, Inc. to acquire a 4-screen specialty-film theater in
Texas. In January 1999, the Company completed the acquisition for approximately
$0.8 million.

CLOSINGS / IMPAIRMENT / DISPOSITIONS

         The Company periodically reviews the profitability of each of its
theaters in conjunction with the lease provisions to determine whether to
continue their operations. Since January 1, 1998, the Company has closed or not
renewed leases for four second-run theaters (17 screens) and two specialty
theaters (4 screens) generally as a result of unfavorable or unavailable lease
renewals or individual theater performance. These closures have resulted in a
$0.7 million charge. During 1998, Silver Cinemas also impaired assets at 16
second-run theaters (124 screens) and 4 first-run theaters (26 screens) based on
its continuing valuation of recoverability of long-lived theater assets
resulting in a charge of $3.9 million. All of these impaired theaters were
acquired as part of larger acquisitions.

         On March 5, 1999, the Company sold its specialty theater in Sacramento,
CA to a non-theater entity for approximately $1.6 million. The Company will
continue to operate this theater on a month-to-month basis for approximately 3
months as the new owner completes plans to redevelop the site. In March 1999,
the Company entered into an agreement to sell its theater in Burton, MI for
approximately $2.0 million. The net proceeds from both sales are being used to
continue the Company's new-build expansion program.

         The Company will continue to evaluate underperforming, and
non-strategic theaters for the possibility of divestiture or restructuring.

CHANGES IN SECURITIES AND USE OF PROCEEDS

         The following sets forth information with respect to securities sold by
the Company for the last twelve months that were not registered under the
Securities Act of 1933, as amended (the "Securities Act"). All securities sold
and not registered were sold in transactions not involving a public offering
under (S) 4(2) of the Securities Act. Additionally, the sale of the 10 1/2%
Senior Subordinated Notes referred to



<PAGE>   5
below was effected in transactions exempt from the registration requirement of
the Securities Act under Regulation S and Rule 144A under the Securities Act. In
April 1998, the Company issued 99,595 shares of its Series A Preferred Stock and
40,500 shares of its common stock to Brentwood Associates Buyout Fund II, L.P.
for $10.0 million. In April 1998, the Company issued 29,878 shares of its Series
A Preferred Stock and 12,151 shares of its common stock to DLJ Fund Investment
Partners II, L.P. for $3.0 million. In November 1998, the Company issued 74,754
shares of its Series A Preferred Stock and 24,603 shares of its common stock to
Brentwood Associates Buyout Fund II, L.P. for $7.5 million. On September 2,
1998, the Company's Registration Statement on Form S-4 (File No. 333-56903)
became effective relating to an offering (the "Exchange Offering") to exchange
10 1/2 Senior Subordinated Notes (which are registered under the Securities Act)
for its then outstanding 10 1/2 Senior Subordinated Notes due 2005 (the "Old
Notes"), which were initially offered (the "Old Notes Offering") and sold by the
Company in April 1998 in a transaction exempt from registration under the
Federal Securities Laws. The initial purchasers in the Old Notes Offering were
Donaldson, Lufkin and Jenrette Securities Corporation, BT Alex. Brown
Incorporated and Bear, Stearns & Co. Inc. The Company did not receive any
proceeds from the Exchange Offering but did receive net proceeds of
approximately $96.0 million from the sale of the Old Notes. The total proceeds
were used by the Company to (i) repay $2.6 million of the Company's outstanding
indebtedness under its former credit facility, (ii) finance the Landmark
Acquisition, the StarTime Acquisition and the AMC Acquisition, (iii) pay a
portion of construction and other expenses relating to the Company's theater
building program and (iv) fund general corporate activities.

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

         The Company is principally engaged in the operation of movie theaters
which serve our customers primarily through the operation of two segments.

         In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which the Company has adopted in the current year. We identify our segments
based on type of film exhibited and management responsibility. The Landmark
segment operates specialty motion picture theaters and the Silver Cinemas
segment operates primarily second-run theaters. For the financial results of the
Company's operating segments, see Note 9 of Notes to Consolidated Financial
Statements incorporated by reference in Item 8 of Part II of this annual report.

(c) NARRATIVE DESCRIPTION OF BUSINESS

GENERAL

         The Company is the largest exhibitor of specialty motion pictures and
one of the largest operators of second-run theaters in the United States. At
March 22, 1999, the Company operated 106 theaters with 538 screens located in
nineteen states. The 106 theaters are comprised of the Landmark segment's 52
specialty motion picture theaters, and the Silver Cinemas segment's 43
second-run theaters and 11 first-run theaters. The Company's strategy is to
acquire theaters in under-served markets, to upgrade and expand theaters to
provide a high-quality movie-going experience and to improve the profitability
of theaters by combining certain administrative functions, obtaining volume
discounts and implementing tighter operating controls.

         Landmark's specialty-film theaters exhibit alternatives to commercial
first-run movies. The specialty-film niche is composed of art films, foreign
pictures and independent releases such as Life is Beautiful, Shakespeare in
Love, Gods and Monsters and Elizabeth which are generally released in limited
numbers to selected markets. Studios such as Disney, Universal, Sony, Paramount,
Twentieth Century Fox and New Line have begun to distribute specialty-films
through dedicated distribution subsidiaries (Miramax, October Films, Sony
Pictures Classics, Paramount's specialty-film division, Fox Searchlight Pictures
and Fine Line, respectively). Management believes that the recent success of
independent films in garnering Academy Award nominations and Academy Awards will
further drive independent film production, particularly from these "independent"
subsidiaries which seek the recognition of these prestigious, high profile
awards. According to Exhibitor Relations Company, Inc., the number of new films
released by independent producers and distributors has increased from 158 in
1992 to 295 in 1997. In



<PAGE>   6

addition to the prestige of the Academy Awards, the generally lower budgets and
higher potential returns on capital invested in specialty films makes the
production of these films financially appealing to the studios. Specialty films
are also attractive to exhibitors since the specialty-film niche tends to
benefit from higher average admission prices and lower film rental expense than
first-run operators, resulting in higher operating margins. Finally, the
specialty-film niche, which generally appeals to more mature and upscale
audiences, is expected to continue to benefit from favorable demographic trends
as a result of the aging of the "baby boom" generation.

         Silver Cinemas' second-run theaters offer major studio productions,
generally six to ten weeks after their initial release dates, at significantly
lower admission prices than commercial first-run theaters, making their revenues
less susceptible to economic recession. Silver Cinemas enjoys more favorable
film booking arrangements and film buying terms at its second-run theaters than
its commercial first-run counterparts. With far fewer second-run screens than
first-run screens nationwide, there is typically little competition for prints
of commercial films, enabling Silver Cinemas to screen its choice of successful
commercial films. First-run theaters, on the other hand, must aggressively
compete for films from distributors and generally screen only a subset of new
releases. In addition to its film booking advantage, Silver Cinemas' second-run
theaters also benefit from lower film rental expense and a larger proportion of
high-margin concession sales as a percentage of overall revenue. Finally, Silver
Cinemas' lower admission prices for its second-run theaters appeal especially to
teen audiences and older patrons, segments of the population which are expected
to experience steady growth over the next decade.

BUSINESS STRATEGY

         The Company's strategy is to increase revenue and cash flow by (i)
acquiring specialty motion picture theaters, (ii) improving operations at
acquired theaters, (iii) building new state-of-the-art specialty film
multiplexes in selected markets, and (iv) adding additional screens, seating
capacity, state-of-the-art sound and projection systems, and other exhibition or
concession equipment at its existing theaters.

         Capitalize on Leading Position in Specialty-Film Segment. Landmark is
the largest exhibitor of specialty motion pictures and the only specialty-film
exhibitor with a national presence. Landmark has a leading presence in, among
others, the following major markets: Los Angeles, San Francisco, Boston, Dallas,
Houston, Seattle, San Diego, Minneapolis, St, Louis, Denver, Detroit, Milwaukee
and New Orleans. Landmark plans to use its experience in the specialty-film
niche to establish a presence in the following strategic new markets: Chicago,
New York, and Washington D.C. Landmark achieved its leading presence by
developing strong relationships with specialty-film distributors, many of whom
rely on the Company's expertise in distributing and marketing specialty films.
These relationships enable Landmark to secure film prints in limited release and
secure a period of exclusivity in exhibiting selected new films in many of its
markets. For example, for films such as Shakespeare in Love, Life is Beautiful
and Elizabeth the Company had exclusive rights to the films for up to three
weeks in selected markets.

         Leverage Existing Infrastructure and Control Operating Costs. The
Company has successfully integrated and improved the operations of its
acquisitions. Management believes significant opportunities exist to leverage
its existing infrastructure over future acquisitions and realize significant
operating improvements through the implementation of superior operating
procedures, management oversight and its state-of-the-art management information
system. Specific areas of improvement include (i) labor scheduling, (ii) film
selection and lineup, (iii) cash control, (iv) pricing policies, and (v)
purchasing discounts on concession contracts. Additionally, many of the smaller
theater chains lack the sophisticated information systems employed by the
Company, which the Company believes are necessary to effectively manage a
geographically diverse group of theaters.

         Expand Established Second-Run Operations. Silver Cinemas believes it is
the leading operator of second-run theaters in its markets, operating 43
second-run theaters with 309 screens in 13 states. By offering patrons a
high-quality alternative to commercial first-run exhibitors at a low price,
Silver Cinemas avoids direct competition with commercial first-run theaters. In
addition, the second-run niche offers other attractive characteristics which
include (i) lower film costs as a percentage of admission revenue, (ii) greater
percentage of total revenue from high margin concessions, (iii) greater
recession resistance due



<PAGE>   7

to lower admission prices, and (iv) lower seasonal variability than commercial
first-run exhibitors due to a staggered film release schedule.

         Provide a Superior Movie-Going Experience. The Company seeks to provide
audiences with a high quality viewing experience, comparable to that available
at new commercial first-run theaters. To enhance the movie-going experience, the
Company invests in high quality projection and stereo sound equipment,
comfortable chairs with wide seats and cupholder armrests, and appealing lobby
and concession areas. Since many competitors in the specialty-film and
second-run exhibition niches do not focus on these aspects of operations,
management believes that this strategy provides it with a distinct competitive
advantage.

         Pursue Attractive Construction Opportunities. The Company continually
evaluates existing and new markets for new theater locations for specialty-film
theaters. The Company generally seeks to develop theaters in markets that are
under-served as a result of changing demographic trends or the aging or
obsolescence of existing theaters. Some of the factors management considers in
determining whether to develop a theater in a particular location are the
market's population, average household income, education levels, proximity to
retail corridors, convenient roadway access, proximity to competing theaters,
and the effect on the Company's existing theaters in the market, if any.

          Pursue Strategic Acquisitions. The Company intends to continue to
selectively acquire and integrate theaters primarily in the specialty-film
niche. Management believes that there are many attractive acquisition candidates
in the highly fragmented exhibition industry. Management believes that the
recent consolidation trend in the exhibition industry is driving many major
exhibitors to dispose of non-core properties, many of which are specialty-film
or second run theaters that do not fit those companies' commercial first-run
strategies.

RECENT ACQUISITIONS

         From its inception through December 31, 1997, the Company completed
seven acquisitions, representing 26 theaters with an aggregate of 154 screens.
During 1998, the Company continued the expansion of its business with the
acquisition of 81 theaters (372 screens) and the construction of three theaters
(18 screens). The Company anticipates that its future growth will come primarily
through the development of new specialty motion picture theaters and selected
strategic acquisitions.

         The following table sets forth the Company's completed acquisitions
since its inception in June 1996.


<PAGE>   8


<TABLE>
<CAPTION>
Date                      Seller                   Theaters    Screens                              State
-----------------------   --------------------   ----------    ----------   --------------------------------------
<S>                       <C>                    <C>           <C>          <C>
November 1996             Movie One                       4           22    NM, TX

November 1996             MI Theaters                    14           80    LA, FL, OK, TX

January 1997              Cinamerica                      1            6    CA

January 1997              Wometco                         2           19    FL

April 1997                Hoyts                           2           12    NY, VT

May 1997                  United Artists                  1            4    TX

September 1997            Westminster (1)                 2           11    CO

April 1998                AMC                             3           17    MI, TX

April 1998                StarTime                       27          202    AZ, CA, CO, FL, NE, NY, OH, OK, TX, WI

April 1998                Landmark                       49          140    CA, CO, LA, MA, MI, MN, OH, TX, WA, WI

May 1998                  US District Court               1           12    TX

June 1998                 Checci Gori (2)                 1            1    CA

January 1999              Dinger Bros.                    1            4    TX
                                                 ==========   ========== 
                                                        108          530
                                                 ==========   ========== 
</TABLE>

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

(1)      Operated pursuant to a management agreement from September 1997 to 
         August 1998.

(2)      Theater currently operated pursuant to a management agreement.

PENDING THEATER CONSTRUCTION

         The Company continually evaluates existing and new markets for the
construction and expansion of specialty-film theaters. The Company generally
seeks to develop theaters in markets that are under-served as a result of
changing demographic trends or the aging or obsolescence of existing theaters.
Some of the factors management considers in determining whether to develop a
theater in a particular location are the market's population, average household
income, education levels, proximity to retail corridors, convenient roadway
access, proximity to competing theaters, and the effect on the Company's
existing theaters in the market, if any.

         The Company completed the construction of its first multiplex theater
with ten screens in Des Moines, Iowa in June 1997. The Company also completed
the expansion of its existing facility in LaPlace, Louisiana in September 1997,
which increased the number of screens from six to seven and the number of seats
from 734 to 970. In June 1998, the Company opened two, six-screen theatres in
Waltham, Massachusetts and St. Louis, Missouri. In November 1998, the Company
opened a six-screen theater in Burton, Michigan.

         In addition, the Company has executed leases for the construction of
three specialty theatres with 20 screens in New York City, NY Chicago, IL and
Washington D.C. and two second-run theaters with 14 screens in Joliet, IL and
Roseville, MI.

         The following table summarizes the Company's completed expansions of
existing theaters and construction of new theaters since its inception in June
1996.



<PAGE>   9

COMPLETED THEATER CONSTRUCTION AND EXPANSION

<TABLE>
<CAPTION>
                                                                                                   ADDITIONAL
DATE                         LOCATION                FORMAT            TYPE OF PROJECT             SCREENS
-------------------------------------------------------------------------------------------------------------
<S>                          <C>                     <C>               <C>                         <C>
June 1997                    Des Moines, IA          Second-run        New Theater                 10
September 1997               LaPlace, LA             Second-run        Addition                    1
May 1998                     St. Louis, MO           Specialty         New Theater                 6
May 1998                     Waltham, MA             Specialty         New Theater                 6
June 1998                    Yukon, OK               Second-run        Conversion to Stadium      --
November 1998                Burton, MI              First-run         New Theater                 6
</TABLE>

OVERVIEW OF THE EXHIBITION INDUSTRY

         The domestic motion picture exhibition industry is comprised of
approximately 535 exhibitors, approximately 288 of which operate four or more
screens at one or more locations, according to the National Association of
Theater Owners ("NATO"). As of May 1998, the ten largest exhibitors (in terms of
number of screens) controlled approximately 55% of the total screens in the
United States, with no single exhibitor controlling more than 9% of the total
screens.

         According to data released by the Motion Picture Association of America
(the "MPAA"), the total U.S. box office sales of approximately $6.95 billion in
1998 was a record for the exhibition industry. Attendance and domestic box
office revenue have grown since 1992 at compounded annual growth rates of
approximately 4.0% and 6.1%, respectively. The following table summarizes the
recent historical trends in U.S. theater attendance, average ticket price, and
box office sales since 1992.

                          U.S. EXHIBITION STATISTICS

<TABLE>
<CAPTION>
                              Avg. Ticket       Box Office
             Attendance           Price            Sales
Year         (Millions)        (Dollars)        (Millions)
---------  ---------------  ----------------   --------------
<S>        <C>              <C>                <C>   
1992               $1,173             $4.15           $4,871

1993                1,244              4.14            5,154

1994                1,292              4.18            5,396

1995                1,263              4.35            5,493

1996                1,339              4.41            5,911

1997                1,388              4.59            6,366

1998                1,480              4.70            6,950
</TABLE>

         As a result of increased revenues from the successful release of films
in both movie theaters and other distribution channels, film production
companies have increased the number of films being produced in recent years.
Revenues from all distribution channels grew by more than 250% over the past
ten years to $20 billion in 1996. The increased revenue potential from film
distribution in recent years can be attributed to increased demand resulting
from the domestic and international growth of the motion picture exhibition
industry and the home video industry, and the significantly increased channel
capacity created by enhanced cable and satellite-based transmission systems.

         Management believes that the recent critical and commercial success of
smaller budget, independent films will continue to support independent film
production, particularly from the "independent" subsidiaries of major studios
which desire the recognition of these prestigious, high profile awards.
Independent producers and distributors such as (i) Gramercy Pictures
("Gramercy"), (ii) Turner Pictures, which includes New Line Distribution, Inc.
("New Line"), Fine Line Features ("Fine Line"), and Castle Rock Entertainment,
and (iii) Dreamworks SKG, the highly publicized partnership among Jeffrey
Katzenberg,


<PAGE>   10

Steven Spielberg and David Geffen, should help maintain film production at a
high level. These independent film producers, along with the "independent"
subsidiaries of the major distributors such as Miramax Films, Inc. ("Miramax")
which is owned by Buena Vista Pictures Distribution, Inc. ("Buena Vista"),
October Films ("October") which is owned by Universal Pictures ("Universal"),
the new specialty film division of Paramount Pictures, Sony Pictures Classics
("Sony Classics") which is owned by Sony Pictures Releasing ("Sony"), and Fox
Searchlight Pictures ("Fox Searchlight") which is owned by Twentieth Century Fox
("Fox"), have found increasing success with Academy of Motion Picture Arts and
Sciences Awards ("the Academy Awards").

OPERATIONS

LANDMARK

         Landmark is the largest exhibitor in the United States of specialty
films both in terms of number of screens and number of theaters dedicated to
these films. As of March 22, 1999, Landmark operates 52 theaters with 156
screens dedicated to specialty-films in California, Colorado, Louisiana,
Massachusetts, Michigan, Minnesota, Ohio, Missouri, Texas, Washington, and
Wisconsin. Landmark holds the largest or second largest market share of the
specialty-film exhibition business in the following major markets: Los Angeles,
San Francisco, Seattle, Dallas, Houston, Denver, Minneapolis, Boston, Cleveland,
Detroit, Palo Alto, Berkeley, San Diego, St. Louis, Milwaukee and New Orleans.

         The specialty-film exhibition business is the largest niche of the
exhibition industry outside of traditional commercial first-run exhibition in
terms of box office revenue generated. In 1998, according to Entertainment Data,
Inc., films released by independent distributors and "independent" subsidiaries
of major distributors such as Miramax, October Films, and Fine Line generated an
estimated $635 million of box office revenue. Based on Landmark's 1998 box
office revenue from specialty-films, Landmark maintains a market share of
approximately 7% of the total box office revenue generated by specialty-films.

         The following table presents a summary of selected recent films for
which Landmark has been responsible for a significant portion of the total
domestic gross box office, as of December 1998.

SELECTED INDEPENDENT FILM REVENUE GENERATED AT LANDMARK THEATERS

<TABLE>
<CAPTION>

                                                                               Gross Box Office            Landmark
                                                                        -----------------------------    Percentage of
   Year                    Film                     Distributor           National       Landmark       National Gross
------------   ----------------------------  ------------------------   -------------  --------------  ------------------
                                                                               (In Thousands)
<S>    <C>     <C>                           <C>                        <C>            <C>             <C>  
       1998    PI                            Artisan Releasing             $3,221          $899            27.9%

       1998    Lolita                        Samual Goldwyn                 1,476           375             25.4

       1998    High Art                      October                        1,937           456             23.5

       1998    Smoke Signals                 Miramax                        6,888         1,587             23.0

       1998    Opposite of Sex               Sony Classics                  6,367         1,121             17.6

       1998    Happiness                     Good Machine                   2,757           581             21.1

       1998    Spanish Prisoner              Sony Classics                 10,272         1,691             16.5

       1997    Shall We Dance                Miramax                        6,479         1,290             19.9

       1997    Kolya                         Miramax                        5,731         1,060             18.5

       1997    Waiting for Guffman           Sony Classics                  2,893         1,162             40.2
</TABLE>



<PAGE>   11

SILVER CINEMAS

         Silver Cinemas is one of the largest exhibitors of second-run films in
the United States in terms of number of screens, operating 43 theaters and 309
screens dedicated to the second-run format in Arizona, California, Colorado,
Florida, Louisiana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Texas,
Vermont, and Wisconsin.

         Silver Cinemas' second-run theaters typically charge admission prices
of $1.00 to $2.00 but provide many of the same amenities to customers as
first-run theaters. Silver Cinemas' second-run theaters typically offer
wall-to-wall screens, comfortable seating with cupholder armrests, stereo sound,
attractive concession stands, clean and inviting lobby areas, and video games or
game rooms. Management believes that offering this type of "first-run quality"
theatrical experience for a second-run price is the key to generating large
audiences at second-run theaters and subsequently increasing the profitability
of the theaters. Silver Cinemas' second-run theaters benefit from lower film
costs and a greater proportion of total revenue from concession sales than at
comparable first-run theaters.

         Management believes that its second-run theaters appeal to many
customer groups, but in particular allow it to serve (i) families with children,
(ii) patrons who miss a film during its first-run exhibition, and (iii)
customers who may not be able to afford to attend first-run theaters on a
frequent basis.

         In addition to being able to draw customers from a wider group of
potential moviegoers, second-run theaters tend to enjoy better film booking
arrangements and film buying terms than their commercial first-run counterparts.
Film rental costs are generally significantly lower in the second-run format
than in the first-run format. Due to the smaller number of second-run screens in
comparison with the number of first-run screens in the country, there is
typically very little competition among second-run theaters for prints of
commercially successful films. In addition, each second-run theater typically
comprises its own film zone. As a result, Silver Cinemas' second-run theaters
generally benefit from the ability to screen all successful commercial films, as
opposed to the average commercial first-run theater which receives only a subset
of these movies.

CONCESSIONS

         Concession sales are the second largest source of revenue for the
Company after box office admissions, representing approximately 30.6% of total
combined revenues for the year ended December 31, 1998. The Company has devoted
considerable management effort to increasing concession sales and improving the
income margins from concession sales. These efforts include implementation of
the following strategies:

-    Optimization of product mix. The Company's primary concession products
     include popcorn, soft drinks and candy sold at each of the Company's
     theaters. In addition, different varieties and brands of candy and other
     concession items are offered at theaters based on preferences in a
     particular geographic region. The Company has also implemented "combo
     meals" and "movie meals" for children and senior citizens, both of which
     offer a pre-selected assortment of concession products for a slightly
     discounted price. Management believes that these concession packages tend
     to increase overall concession revenue.




<PAGE>   12


-    Introduction of new products. The Company continues to evaluate and
     introduce new concession products designed to attract additional concession
     purchases. Management considers adding new products in many locations,
     including bottled water, bulk candy, frozen yogurt and ice cream.

-    Staff training. Employees are continually trained in "cross-selling" and 
     "upselling" techniques. This training occurs through on-the-job training.

-    Theater design. New theaters are designed to include multiple point-of-sale
     terminals at the concession stand, making it easier to serve large numbers
     of customers rapidly. Strategic placement of large concession stands with
     fast-flow drink dispenser heads within theaters heightens their visibility,
     aids in reducing the length of concession lines and improves traffic flow
     around the concession stands.

-    Price Points. The Company continually reviews product size and price points
     of its concession offerings. In several locations, the product sizes
     offered and prices charged have been reduced to stimulate demand.

-    Cost control. The Company negotiates prices for its concession supplies
     with concession distributors on a bulk rate. The concession distributors
     provide inventory and distribution services to the theaters, which place
     volume orders directly with the concession distributors. The concession
     distributors are paid a fee for such service equal to a percentage of the
     Company's concession supply purchases. The Company believes that
     utilization of concession distributors is more cost effective than
     establishing a concession warehousing network owned by the Company.

FILM LICENSING

         The Company licenses films from distributors on a film-by-film,
theater-by-theater basis. Film buyers negotiate directly with major distributors
and independent distributors on behalf of the Company. Successful licensing
depends in part upon the exhibitor's knowledge of trends and historical film
preferences of the residents in the market served by each theater, as well as on
the availability of commercially successful motion pictures. The Company's film
buyers have significant experience in the theater industry and have developed
long-standing relationships with distributors.

         Landmark's specialty-film theaters license films primarily from
independent film distributors, foreign film distributors, and "independent"
subsidiaries of major film distributors (collectively "independent
distributors"). Similar to the major film distributors, independent distributors
typically establish geographic film licensing zones and allocate each available
film to a single theater within that zone. The size of a film zone is generally
determined by the population density, demographics and box office potential of a
particular market or region, and can range from a radius of approximately five
miles in metropolitan and suburban markets to up to 15 miles in smaller towns.
In general, the major distributors try to place a print of each wide-release
film in as many film zones as possible (often exceeding 3,000 prints), whereas
independent distributors typically exhibit their films in 300 or fewer zones.

         The limited number of prints available of specialty films makes the
runs of these films generally more exclusive in any given market. Management
believes, however, that due to its significant presence in the specialty-film
niche, Landmark has been able to and will continue to be able to secure an
adequate number of prints of films that it feels will be successful. Management
also believes that its large percentage of total national box office of
specialty films gives Landmark the ability to negotiate more favorable film
rental agreements than most other specialty-film exhibitors. For example, for
films such as Shakespeare in Love, Life is Beautiful and Waking Ned Devine,
Landmark had exclusive rights to the films for up to three weeks in selected
markets.


<PAGE>   13
         Silver Cinemas' second-run theaters generally enjoy better film booking
arrangements and film buying terms than comparable commercial first-run
theaters. Film rental costs are generally significantly lower in the second-run
format than in the first-run format, and Silver Cinemas has had no difficulty to
date in securing the films that it believed would be most successful in its
respective markets. Due to the smaller number of second-run screens in
comparison with the number of first-run screens nationwide, there is typically
very little competition among second-run theaters for prints of commercially
successful films. In addition, each second-run theater typically comprises its
own film zone. As a result, Silver Cinemas' second-run theaters generally
benefit from the ability to screen all successful commercial films, as opposed
to the average commercial first-run theater which receives only a subset of
these movies. Based on the different film release schedule in the second-run
format, management also has the benefit of knowing how successful each film was
in its first run prior to committing to that film for a second run.

MARKETING

         In order to attract customers, the Company relies principally on
newspaper display advertisements (substantially paid for by film distributors)
and newspaper directory film schedules (generally paid for by the Company) to
inform customers of film titles and show times. Newspaper directory film display
advertisements are typically displayed in a single group for all of the
Company's theaters located in the newspaper's circulation area. Radio and
television advertising spots (generally paid for by film distributors) are used
to promote certain movies and special events. The Company also exhibits previews
of coming attractions and films presently playing on other screens it operates
in the same theater or market. Upon the opening of a new theater, the Company
undertakes additional one-time marketing efforts, such as special promotions,
advertising and contests.

COMPETITION

         The domestic motion picture exhibition industry is highly competitive,
particularly in licensing films, attracting patrons and finding new theater
sites. According to NATO, there are approximately 535 exhibitors, of which
approximately 288 operate four or more screens at one or more locations. As of
May 1998, the ten largest exhibitors (in terms of number of screens) controlled
approximately 55% of the total screens in the United States, with no single
exhibitor controlling more than 9% of the total screens. Industry participants
vary substantially in size, from small independent operators of single screen
theaters to large national chains of multi-screen theaters affiliated with large
entertainment conglomerates.

         Landmark is the largest exhibitor of specialty motion pictures in the
United States based on the number of screens dedicated to these films and in
terms of box office revenue generated from these films. In addition, Landmark is
one of the largest second-run exhibitors in the United States based on the
number of screens. The Company competes against local, regional, and national
exhibitors, most of which have been in existence significantly longer than the
Company and many of which have substantially greater financial resources than
the Company.

         The Company competes for film based on the location of its theaters and
number of competitors within its film zones. In film zones where the Company has
little or no direct competition, management selects those pictures that it
believes will be most successful in its markets from those offered to it by
distributors. In addition, Landmark is granted a period of exclusivity in its
area for selected specialty films at many of its specialty-film theaters. Silver
Cinemas faces little or no competition for films in any of its second-run film
zones. In film zones in which the Company faces competition for films, it
generally licenses films based on an allocation process. Management believes
that the principal competitive factors in licensing films include: licensing
terms; the seating capacity, location, quality, and reputation of an exhibitor's
theaters; the quality of projection and sound equipment at the theaters; and the
exhibitor's ability and willingness to promote the films.

         The Company competes for customers based on the availability of popular
films, the location of theaters, the comfort and quality of theaters, and ticket
prices. Management believes that its admission prices are competitive with
admission prices of respective competing theaters. 
<PAGE>   14
Management believes that the public will continue to recognize the advantages
of viewing a film on a large screen with superior audio and visual quality,
while enjoying a variety of concessions and sharing the experience with a large
audience. Theatrical exhibition is the primary distribution channel for new
motion picture releases. Successful theatrical release of a film in
international markets and in "downstream" distribution channels, such as home
video, pay-per-view, pay cable, network television, and syndicated television,
generally depends on successful theatrical release in the United States.

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 consent decrees resulting from those cases, to which the Company is
not a party, have a material impact on the industry and the Company. These
consent decrees bind certain motion picture distributors and require the films
of such distributors to be offered and licensed to exhibitors, including the
Company, on a film-by-film and theater-by-theater basis. Consequently, the
Company cannot assure itself of a supply of motion pictures by entering into
long-term arrangements with major distributors, but must compete for its
licenses on a film-by-film and theater-by-theater basis.

         The Company is subject to various general regulations applicable to its
operations including the Americans with Disabilities Act (the "ADA"). The
Company is not currently aware of any pending or threatened action which will
have a material adverse effect on the Company's financial condition, results of
operations and cash flows. 

EMPLOYEES

         The Company has approximately 2,300 employees, of which approximately
85% are part-time employees who are paid on an hourly basis. The International
Alliance of Theatrical Stage Employees pursuant to collective bargaining
agreements represents film projectionists at certain of the Company's theaters
in California, Colorado, Ohio, Massachusetts, Minnesota, Texas, and Washington.
In addition, the Theatrical Janitors Union represents janitors at the Company's
theater in Berkeley, California. These collective bargaining agreements, which
cover an aggregate of 56 of the Company's employees, expire at various periods
through 2001. The Company believes its relations with its employees are good.
The Company's expansion into new markets may increase the number of employees
represented by unions.

ITEM 2.  PROPERTIES

PROPERTIES

         Of the 106 theaters operated by the Company, 92 were leased, 10 were
owned, three buildings were owned by the Company on properties covered by
ground leases, and one is operated pursuant to a management agreement. The
Company's leases typically have remaining terms from one to 25 years, with
options to extend the leases for up to ten additional years. The leases
typically require escalating minimum annual rent payments and additional rent
payments based on a percentage of the leased theater's revenue above a base
amount and require the Company to pay for property taxes, maintenance, insurance
and certain other property-related expense during the term of the lease. The
terms are negotiated at the signing of the lease.

         During the next five years approximately 51 theater leases
(representing 217 screens) will expire, representing approximately 48% of all
the Company's theaters (40% of all screens). Of those coming due within the next
five years, leases at 36 theaters (representing 169 screens) will be subject to
renewal options, 6 theaters (representing 25 screens) are currently operated on
a month to month basis and 9 theaters (representing 23 screens) currently have
no renewal options.


<PAGE>   15

         The majority of the concessions, projection, seating, and other related
equipment required for each of the Company's theaters is owned.

         The Company leases office space in Addison, Texas and Los Angeles,
California for its corporate headquarters.

ITEM 3.  LEGAL PROCEEDINGS

LEGAL PROCEEDINGS

         From time to time the Company is involved in legal proceedings arising
from the ordinary course of its business operations. The Company does not
believe that the resolution of these proceedings will have a material adverse
effect on the Company's financial condition, results of operations and cash
flows.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.

                                     PART II

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

         There is no established public trading market for the Company's Common
or Preferred Stock. As of March 15, 1999, there were 15 holders of record of
the Company's Common Stock and 9 holders of the Company's Preferred Stock. The
Company has not paid dividends on its Common Stock and does not expect to pay
dividends on its Common Stock in the foreseeable future. The Senior Subordinated
Notes Indenture contains restrictions on the Company's ability to pay dividends
on its Common and Preferred Stock. The Company's Preferred Stock accrues a $6.00
cumulative annual dividend on each outstanding share and is payable if earned
and declared, if the preferred stock is redeemed or if the Company is
liquidated. As of December 31, 1998 and 1997, aggregate Series A Preferred Stock
dividends of $2,776,235 and $1,213,131 are accrued and unpaid.

<PAGE>   16
ITEM 6.  SELECTED FINANCIAL DATA

THE COMPANY

         The following table sets forth selected consolidated financial data for
the Company for the periods and at the dates indicated for the years ended
December 31, 1998 and 1997 and for the period from May 10, 1996 (date of
inception) to December 31, 1996. This information should be read in conjunction
with "Management Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, including the
notes thereto, appearing elsewhere in this report.


<PAGE>   17

<TABLE>
<CAPTION>
                                                                          Period From
                                                                          May 10, 1996
                                                                       (Date of Inception)   Year Ended      Year Ended
                                                                         to December 31,    December 31,     December 31,
                                                                              1996             1997             1998
                                                                          ------------     ------------     ------------
                                                                          (In Thousands, except theater and screen data)
<S>                                                                       <C>              <C>              <C>         
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
     Revenues .........................................................   $      1,420     $     18,762     $     77,216
     Theater operating costs ..........................................          1,219           16,102           67,778
     General and administrative expenses ..............................            577            1,901            6,272
     Depreciation and amortization ....................................            103            1,479            6,507
     Asset impairment charge ..........................................                                            4,580
     Operating loss ...................................................           (479)            (720)          (7,921)
     Interest expense .................................................                             353            7,940
     Amortization of debt issue costs .................................                              55            1,469
     Net loss .........................................................           (382)          (1,173)         (16,786)

CONSOLIDATED OTHER FINANCIAL DATA:
     Deficiency of earnings to fixed charges (1) ......................   $        382     $      1,156     $     16,786
     Theater level cash flow (2) ......................................            201            2,660            9,438
     Theater level cash flow margin (3) ...............................           14.2%            14.2%            12.2%
     EBITDA (4) .......................................................   $       (376)    $        759     $      3,166
     Cash flow from (used for):
        Operating .....................................................   $        733              757     $     (3,935)
        Investing .....................................................        (13,180)          (9,047)        (102,546)
        Financing .....................................................         17,156            3,857          109,086
     Capital Expenditures (5) .........................................   $        182     $      4,556     $      7,934

THEATER DATA:
     Theaters .........................................................             18               27              105
     Screens ..........................................................            102              165              534

CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):
     Cash and cash equivalents ........................................                    $        276     $      2,881
     Theater properties and equipment -- net ..........................                           8,688           66,913
     Total assets .....................................................                          21,927          132,392
     Total long-term debt and capital leases, including current portion                           6,597          107,139
     Stockholders' equity .............................................                          13,633           17,585
</TABLE>

(1)  Earnings consist of net loss before taxes, plus fixed charges. Fixed
     charges consist of interest expense, amortization of debt issuance costs
     and one third of rent expense on operating leases treated as representative
     of the interest factor attributable to rent expense.

(2)  Theater level cash flow represents operating income plus depreciation and
     amortization plus asset impairment charge plus general and administrative
     expenses. The Company believes theater level cash flow provides useful
     information regarding the Company's ability to generate cash flow at the
     theater level; however, theater level cash flow does not represent cash
     flow from operations as defined by generally accepted accounting principles
     and should not be considered as a substitute for cash flow from operations
     as an indicator of operating performance or as a measure of liquidity.

(3)  Theater level cash flow margin represents theater level cash flow divided
     by revenues.

(4)  EBITDA represents operating income plus depreciation and amortization plus
     asset impairment charge. The Company believes that EBITDA provides useful
     information regarding the Company's ability to service its debt; however,
     EBITDA does not represent cash flow from operations as defined by generally
     accepted accounting principles and should not be considered as a substitute
     for net income as an indicator of the Company's operating performance, cash
     flow or as a measure of liquidity.


<PAGE>   18

(5)  Capital expenditures includes only the amounts expended for purchases of
     property and equipment.

LANDMARK

         The following table sets forth selected consolidated financial and
operating data for Landmark derived from audited financial statements for the
periods ended December 31, 1997, December 31, 1996, June 30, 1996, March 31,
1996 and March 31, 1995, and from unaudited financial statements for the nine
months ended December 31, 1998 and three months ended March 31, 1998. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations." A major portion of
the Company's business and assets was acquired from Landmark, and for accounting
purposes only, Landmark should be considered a predecessor of Company pursuant
to Rule 405 of regulation C of the Securities Act.

<TABLE>
<CAPTION>
                                                                         Three        Six                     Three        Nine
                                                                         Months      Months                   Months      Months
                                                Year Ended  Year Ended   Ended       Ended       Year Ended   Ended        Ended
                                                 March 31,   March 31,  June 30,  December 31,  December 31, March 31,  December 31,
                                                   1995        1996       1996        1996          1997       1998         1998
                                                ----------- ----------- --------  ------------  ------------ ---------  ------------
                                                                (In thousands, except theater, screens and ratio data)
                                                                                                                          
                                                    (Predecessor)                    (Second Predecessor)                (Successor)
                                                --------------------------------  ------------------------------------   -----------
<S>                                                <C>         <C>       <C>         <C>           <C>        <C>        <C>
Consolidated Statement of Operations Data:
    Revenues .................................     $46,401     $51,143   $11,576     $29,581       $56,954    $15,660     $ 39,804
    Theater operating costs ..................      37,654      42,105    10,244      23,305        45,822     12,194       32,654
    General and administrative expenses ......       3,634       4,225     1,189       2,426         5,191      1,357        2,631
    Depreciation and amortization ............       3,241       3,569       906       2,237         4,929      1,290        3,272
    Operating income (loss) ..................       1,872       1,244      (763)      1,613         1,012        819        1,178
    Interest expense .........................         516         716       237         458           748        162         (360)
    Net income (loss) ........................         700         207      (647)        495          (232)       265          924

Consolidated Other Financial Data:
    Ratio of earnings to fixed charges (1) ...        1.54x       1.18x                 1.69x         1.09x      1.93x         N/A
    Deficiency of earnings available to cover
       fixed charges (1)                                                 $(1,000)
    Theater level cash flow (2) ..............     $ 8,747     $ 9,038     1,332     $ 6,276       $11,132    $ 3,466     $  7,187
    Theater level cash flow margin (3) .......        18.9%       17.7%     11.5%       21.2%         19.5%      22.1%       18.0%
    EBITDA (4) ...............................     $ 5,113     $ 4,813   $   143     $ 3,850       $ 5,941      2,109        4,585

Theater Data:
    Theaters .................................          50          52        52          50            49         49           51
    Screens ..................................         125         140       140         138           140        140          152

Consolidated Balance Sheet Data
    (at Period End):
    Theater properties and equipment -- net                                          $35,632       $35,023    $35,795     $ 42,587
    Total assets                                                                      61,476        60,749     59,835       79,865
</TABLE>                                                      

(1)  Earnings consist of net income before taxes, plus fixed charges. Fixed
     charges consist of interest expense, and one third of rent expense on
     operating leases treated as representative of the interest factor
     attributable to rent expense.

(2)  Theater level cash flow represents operating income plus depreciation and
     amortization plus general and administrative expenses. The Company believes
     theater level cash flow, provides useful information regarding the
     Company's ability to generate cash flow at the theater level; however,
     theater level cash flow does not represent cash flow from operations as
     defined by generally accepted accounting principles and should not be
     considered as a substitute for cash flow from operations as an indicator of
     operating performance or as a measure of liquidity.

(3)  Theater level cash flow margin represents theater level cash flow divided
     by revenues.

(4)  EBITDA represents operating income plus depreciation and amortization. The
     Company believes that EBITDA provides useful information regarding the
     Company's ability to service its debt; however, EBITDA does not represent
     cash flow from operations as defined by generally accepted accounting
     principles and should not be considered as a substitute for net income as
     an indicator of the Company's operating performance, cash flow or as a
     measure of liquidity.


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

OVERVIEW

         The following analysis of the financial condition and results of
operations of the Company and Landmark and Silver Cinemas should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere herein.

         Since inception in May 1996, the Company has experienced rapid revenue
growth through theater acquisition and the development of new theaters. During
fiscal year 1996, the Company acquired 18 theaters with 102 screens. During
fiscal year 1997, the Company acquired eight additional theaters with a total of
52 screens, constructed one theater with ten screens and added one screen to an
existing theater. In the current fiscal year through December 31, 1998, the
Company has acquired 81 theaters with 372 screens, opened three newly
constructed theaters with 18 screens, closed 4 theaters with 10 screens, and
terminated the management agreement on 2 theaters with 11 screens, bringing the
Company's total theater and screen count to 105 and 534 respectively. The
Company expects that its future revenue growth will be derived primarily from
the operation of its existing theaters, the acquisition and construction of
specialty theaters and the addition of screens and seating to existing theaters.

         In 1998, the Company incurred a net loss of $16.8 million compared with
a net loss in 1997 of $1.2 million. The loss in 1998 included charges totaling
$4.6 million for the impairment of value of certain theaters. Excluding the
impairment charges, the net loss in 1998 increased 917% to $12.2 million from
the loss in 1997.

         The impairment charges of $4.6 million to operating expenses reflect
the impairment of value which was composed of noncash write-downs of goodwill of
$2.8 million and theater properties and equipment of $1.6 million and other
costs totaling $0.2 million.

         The consolidated operating loss in 1998 was $7.9 million, compared with
a operating loss of $0.7 million a year ago. Excluding the impairment charges,
operating loss increased 371% from 1997. Revenues in 1998 grew $58.4 million, or
311%, to $77.2 million, as a result of the Company's acquisitions during 1998.
Expenses, excluding impairment costs, increased $61.0 million, or 313%.

         In 1997, the Company incurred a net loss of $1.2 million compared with
a net loss in 1996 of $0.4 million for the period from May 10, 1996 (date of
inception) to December 31, 1996.

         The consolidated operating loss in 1997 was $0.7 million, compared with
a operating loss of $0.5 million for the period from May 10, 1996 (date of
inception) to December 31, 1996. Revenues in 1997 grew $17.4 million, or 1,243%,
to $18.8 million. Expenses increased $17.6 million, or 926%.

SEGMENT DATA

         A summary of the results of operations for each of the Company's
principal business segments is displayed in Note 9 to the consolidated financial
statements.

         The Company's business operations are aligned into the following two
segments: Landmark (Specialty Film) and Silver Cinemas (primarily second-run).


<PAGE>   20

RESULTS OF OPERATIONS OF LANDMARK

         The following table sets forth information for certain predecessor and
successor fiscal periods used to present, without adjustment, information for
the years ended December 31, 1998, 1997 and 1996. This information is provided
herein for the purpose of presenting comparisons for such periods; however, the
Company makes no representations as to its usefulness for such purpose.

<TABLE>
<CAPTION>
                            Combined                                                                     Combined
                              Year               Year           Three Months       Nine Months             Year
                              Ended              Ended             Ended              Ended                Ended
                           December 31,       December 31,        March 31,         December 31,        December 31,
                               1996               1997              1998               1998                 1998
                         ----------------   ----------------   ----------------   ----------------   -----------------
                                (First Predecessor)                                  (Successor)
<S>                      <C>         <C>    <C>         <C>    <C>         <C>    <C>         <C>    <C>       <C>
Revenues:
       Admissions        $45,648     80.8%  $45,903     80.6%  $12,643     80.7%  $31,794     79.9%  $44,437      80.1%
       Concessions         9,764     17.3    10,061     17.7     2,813     18.0     7,240     18.2    10,053      18.1
       Other               1,088      1.9       990      1.7       204      1.3       770      1.9       974       1.8
                         -------  -------   -------  -------   -------  -------   -------  -------   -------    ------
            Total         56,500    100.0    56,954    100.0    15,660    100.0    39,804    100.0    55,464     100.0 

Costs and expenses
     Cost of operations:
       Film rentals
         and advertising  23,478     41.6    23,212     40.8     6,201     39.6    15,298     38.4    21,499      38.8
       Cost of
         concessions       2,004      3.5     2,096      3.7       581      3.7     1,430      3.6     2,011       3.6
       Payroll and related
         expenses          8,998     15.9     9,448     16.6     2,470     15.8     6,529     16.4     8,999      16.2
       Occupancy costs     5,527      9.8     5,596      9.8     1,478      9.4     4,282     10.7     5,760      10.4
       Other theater
         operating costs   5,405      9.6     5,470      9.6     1,463      9.3     5,115     12.9     6,578      11.9
                         -------  -------   -------  -------   -------  -------   -------  -------   -------   -------
            Total         45,412     80.4    45,822     80.5    12,193     77.8    32,654     82.0    44,847      80.9

     General and
       administrative      4,972      8.8     5,191      9.1     1,357      8.7     2,631      6.6     3,988       7.2
     Depreciation and
       and amortization    4,120      7.4     4,929      8.7     1,290      8.2     3,271      8.2     4,561       8.2
     Asset Impairment                                                                  70      0.2        70       0.1
     Operating income                                                              
                         -------  -------   -------  -------   -------  -------   -------  -------   -------   -------
       (loss)            $ 1,996      3.5%  $ 1,012      1.8%  $   820      5.2%  $ 1,178      3.0%  $ 1,998       3.6%
                         =======  =======   =======  =======   =======  =======   =======  =======   =======   =======
</TABLE>

YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

Information for 1998 includes approximately 3 months under prior ownership,
which have been added to the Company's period of ownership to derive a year of
operating results. Since Landmark was operated for a partial year under current
management, many of the Company's cost saving programs are not fully reflected
in the 1998 results.

         Admissions revenues. Admissions revenues decreased $1.5 million or 3.2%
to $44.4 million during the year ended December 31, 1998. The decreased
admissions revenue was primarily the result of a 1.2% decrease in the average
ticket price from $5.95 to $5.88 and an 2.0% reduction in attendance from
7,712,000 to 7,562,000. Landmark benefits from having an average ticket price
that is substantially higher than the national average ticket price ($5.88 vs.
$4.59 for 1997 respectively) and strong customer loyalty due to their dedication
to the specialty-film market.

         Concessions revenues. Concessions revenues were flat from year to year
at $10.1 million. The slight decrease in attendance was offset by a slight
increase in the average concession sale per attendee from $1.30 to $1.33.

         Film and advertising expenses. Film rental and advertising expenses as
a percentage of admissions revenue decreased from 50.6% to 48.4% as a result of
more aggressive film settlement, the ability to extend the run of several
successful releases during 1998, and more efficient recovery of advertising
co-op expenses. Landmark's film rental rates are typically below film rental
rates of first-run theaters, which average in the low to mid 50% range.

         Cost of concessions. Concession costs as a percentage of concession
revenue decreased slightly in 1998 from 20.8% to 20.0%. Concession costs for
Landmark are at the higher end of the range for theater circuits. Landmark's
higher rate is partially attributable to the lower-margined specialty concession
items offered (cookies, coffee, desserts), and increased spoilage. These added
costs are partially offset by the Company's negotiated volume discounts on the
traditional theater concession items including fountain drinks. Most of the
volume discounts were put in place by the Company during the second and third
quarters of 1998.

         Payroll and related expense. Payroll expense decreased from $9.4
million for the year ended December 31, 1997 to $9.0 million for the year ended
December 31, 1998. Payroll per attendee, a key measure for staff efficiency,
decreased from $1.23 per attendee to $1.19 per attendee. The decrease is
primarily attributable to the Company's efforts to train theater managers to
adjust their staffing levels to the level of business. The benefits attributable
to more efficient staffing schedules were partially offset by higher staff
levels for the Company's two theater openings in 1998, which typically require
more staff prior to and shortly after opening.

         Occupancy costs. Occupancy costs increased from $5.6 million for the
year ending December 31, 1997 to $5.8 million for the year ending December 31,
1998 primarily due to a higher theater count and contractual escalations in
Landmark's operating leases.

         General and administrative expenses. General and administrative
expenses decreased from $5.2 million for the year ended December 31, 1997 to
$4.0 million for the year ended December 31, 1998. The decrease was primarily
the result of the elimination of duplicate staff positions following the
acquisition.


YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996

         Admissions revenues. Admissions revenues increased $0.2 million or 0.5%
to $45.9 million during the year ended December 31, 1997. The increased
admissions revenue was primarily the result of a 4.0% increase in the average
ticket price from $5.72 to $5.95, partially offset by a 3.3% reduction in
attendance from 7,974,962 to 7,712,422. Landmark benefits from having an average
ticket price that is substantially higher than the national average ticket price
($5.95 vs. $4.59 for 1997 respectively) and strong customer loyalty due to their
dedication to the specialty-film market.

         Concessions revenues. Concessions revenues increased $0.3 million or
3.0% to $10.1 million during the year ended December 31, 1997. The increased
concession revenue was primarily the result of a 6.6% increase in the average
concession sale per attendee from $1.22 to $1.30, partially offset by a 3.3%
reduction in attendance from 7,974,962 to 7,712,422. In addition to offering the
traditional movie theater concessions of popcorn, soft drinks and candy,
Landmark theaters work with local vendors to provide specialty items that cater
to their customers, such as fresh pastry, specialty coffees, and desserts.


<PAGE>   21
         Film and advertising expenses. Film rental and advertising expenses as
a percentage of admissions revenue decreased from 51.4% to 50.6% as a result of
more aggressive film settlement as well as the ability to extend the run of
several successful releases during 1997. Landmark's film rental rates are
typically below film rental rates of first-run theaters, which average in the
low to mid 50% range. The low film rental expense combined with the above
average ticket price contributes to Landmark's overall profitability.

         Cost of concessions. Concession costs as a percentage of concession
revenue increased slightly in 1997 from 20.5% to 20.8%. Concession costs for
Landmark are at the higher end of the range for theater circuits. Landmark's
higher rate is partially attributable to the lower-margined specialty concession
items offered (cookies, coffee, desserts), increased spoilage and fewer volume
discounts.

         Payroll and related expense. Payroll expense increased from $9.0
million for the twelve months ended December 31, 1996 to $9.4 million for the
year ended December 31, 1997. Payroll per attendee, a key measure for staff
efficiency, increased from $1.13 per attendee to $1.22 per attendee. The
increase is partially attributable to the addition of a dedicated ticket taker
at the majority of theaters, and the opening of two new theatres, which
typically require more staff prior to and shortly after opening.

         Occupancy costs. Occupancy costs were flat from the prior year at $7.1
million.

         General and administrative expenses. General and administrative
expenses increased from $5.0 million for the year ended December 31, 1996 to
$5.2 million for the year ended December 31, 1997. The increase was primarily
the result of management bonuses, travel associated with new site development
and increased corporate occupancy expenses. These increases were partially
offset by a reduction in legal expenses associated with the successful defense
of litigation relating to a theater lease in 1996.

<PAGE>   22

RESULTS OF OPERATIONS OF SILVER CINEMAS

         The following table sets forth for the fiscal periods indicated the
percentage of total revenues represented by certain items:

<TABLE>
<CAPTION>
                                        Period from
                                        May 10, 1996
                                      (Date of inception)       Year Ended              Year Ended
                                        to December 31,         December 31,           December 31,
                                             1996                   1997                   1998
                                     -------------------    -------------------    -------------------
<S>                                  <C>        <C>         <C>        <C>         <C>        <C>  
Revenues:
      Admissions                     $    787       55.4%   $ 10,368       55.3%   $ 20,333       54.4%
      Concessions                         610       43.0       8,098       43.2      16,383       43.8
      Other                                23        1.6         296        1.5         696        1.8
                                     --------   --------    --------   --------    --------   --------
           Total                        1,420      100.0      18,762      100.0      37,412      100.0

Costs and expenses
    Cost of operations:
      Film rentals                        378       26.6       4,484       23.9       7,737       20.7
      Cost of concessions                 111        7.8       1,462        7.8       2,415        6.5
      Payroll and related expenses        276       19.4       3,065       16.3       6,927       18.5
      Occupancy costs                     207       14.6       2,813       15.0       7,872       21.0
      Advertising                          46        3.2         755        4.0       1,767        4.7
      Other theater operating costs       201       14.2       3,523       18.8       8,406       22.5
                                     --------   --------    --------   --------    --------   --------
           Total                        1,219       85.8      16,102       85.8      35,124       93.9

    General & administrative              577       40.6       1,901       10.1       3,641        9.7
    Depreciation and amortization         103        7.3       1,479        7.9       3,236        8.6
    Asset impairment charges                0        0.0           0        0.0       4,510       12.1
                                     ========   ========    ========   ========    ========   ========
    Operating income (loss)          $   (479)     (33.7)%  $   (720)      (3.8)%  $ (9,099)     (24.3)%
                                     ========   ========    ========   ========    ========   ========
</TABLE>

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

         Admissions Revenues. Admissions revenue increased $10.0 million or
96.1% to $20.3 million during the year ended December 31, 1998. The increased
admission revenue was primarily the result of the addition of 31 newly acquired
or constructed theaters representing 228 screens. The average ticket price for
the circuit increased from $1.66 to $1.68 primarily as the result of the
addition of one newly constructed first-run theater and a change in format from
second-run to first run.                      

         Concession Revenues. Concession revenue increased $8.3 million or
102.3% to $16.4 million during the year ended December 31, 1998. The increased
concession revenue was primarily the result of the newly acquired and
constructed theaters and a 4.7% increase in the average concession sale per
attendee from $1.29 to $1.35 due primarily to retail price adjustments.

         Film Rental Expenses. Film rental expenses as a percentage of
admissions revenues declined slightly from 43.2% for the year ended December 31,
1997 compared to 38.1% for the year ended December 31, 1998. The decrease was
primarily attributable to the acquisition of 31 second-run theaters during the
year, which increased the percentage of admission revenue that was contributed
by second-run theaters when compared to December 31, 1997.

         Concession Supplies Expenses. Concession costs as a percentage of
concession revenue for the period to period comparison decreased from 18.1% of
concession sales to 14.7% primarily due the negotiation of lower wholesale
prices, standardizing menus, and the adjustment of retail prices to reflect
local market conditions for those theaters operated more than year. 

         Salaries and Wage Expenses. Payroll expense increased from $3.1 million
or 126.0% for the year ended December 31, 1997 to $6.9 million for the year
ended December 31, 1998 due primarily to the addition of the newly acquired and
constructed theaters.

         Facility Lease Expenses. Facility leases increased $5.1 million to $7.9
million or 179.8% for the year ended December 31, 1998 from $2.8 million for the
year ended December 31, 1997. The increase in facility lease expense is
primarily attributable to the additional theaters acquired and constructed
during 1998. Reflected in facility lease expense are non-cash charges of $0.2
million which relate to the straight-lining of rent expense over the term of the
leases.

         Advertising Expenses. Advertising expenses increased $1.0 million or
134.0% from the year ended December 31, 1998 compared to the year ended December
31, 1997. Advertising expenses comprised 4.7% and 4.0% of total revenues for the
years ended December 31, 1998 and 1997 respectively. The higher percentage for
the year ended December 31, 1998 was due primarily to the additional cost of
promoting a theater's change from second-run to first-run and the marketing of a
newly constructed theater that opened in November 1998.

          Utilities and Other Expenses. Utilities and other expenses increased
from $3.5 million to $8.4 million or 138.6% for the year ended December 31, 1998
compared to the year ended December 31, 1997. The increase was primarily the
result of the additional theaters operated at December 31, 1998 compared to
December 31, 1997.

         General and Administrative Expenses. General and administrative
expenses increased from $1.9 million to $3.6 million or 91.6% for the year ended
December 31, 1998 compared to the year ended December 31, 1997. The increase was
primarily the result of increased payroll costs associated with the Company's
expansion and one-time severance expenses of $0.1 million.

         Depreciation and Amortization. Depreciation and amortization increased
$1.8 million to $3.2 million or 118.7% for the year ended December 31, 1998 from
$1.5 million for the year ended December 31, 1997. The increase was primarily
the result of theater property additions associated with the Company's expansion
efforts.

         Asset Impairment Charges. Based on recent trends in declining
attendance in several of silver cinemas' markets, the company reviewed it assets
for impairment. For 20 theaters (150 screens) the carrying value of the assets
exceeded the expected future cash flows from the theater indicating impairment.
The impairment was measured by the amount by which the carrying amount of the
assets of the theater exceeded the estimated fair value of the assets. This
resulted in a $3.9 million charge to earnings during 1998. Additionally, the
company also recognized $0.6 million in write downs related to the closings of
two theaters.

         Operating Loss. The operating loss for the year ended December 31, 1998
increased by $8.4 million to ($9.1) million or (24.3%) of total revenues,
compared to an operating loss of $0.7 million, or (3.8%) of total revenues, for
the year ended December 31, 1997.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM MAY 10, 1996 (DATE OF
INCEPTION) TO DECEMBER 31, 1996

         Meaningful comparisons of the year ended December 31, 1997 and the
period from May 10, 1996 to December 31, 1996 are not possible given the short
operating history of those theaters purchased late in 1996. The significant
increases from 1996 to 1997 in revenue, expenses and depreciation and
amortization are the result of operating 18 theaters acquired in 1996 for a full
year, plus the additional nine theaters acquired throughout 1997. The following
presents the primary revenue and expense categories for Silver Cinemas.


<PAGE>   23

         Revenues. Silver Cinemas' revenues are generated primarily from box
office admission receipts and concession sales. For the year ended December 31,
1997 and the period from May 10, 1996 (date of inception) to December 31, 1996,
admissions revenues comprised approximately 55% of total revenues for both
periods and concessions revenues comprised approximately 43% of total revenue
for both periods. The remaining approximately 2% of revenue for those periods
was derived primarily from electronic video games located in theater lobbies.

         Admissions Revenues. Box office admission receipts are based on the
level of theater attendance and the average ticket price. Attendance levels are
primarily affected by the commercial appeal of released films, and to a lesser
extent, by the comfort and quality of the theater, competition from other local
theaters and population growth in the geographic markets Silver Cinemas serves.
Silver Cinemas' ticket prices vary throughout the circuit depending upon such
things as type of theater (second-run or first-run), local competition and local
economies, as well as special discounts and pricing promotions. Admissions
revenue is recorded net of applicable sales taxes.

         Concessions Revenues. Concessions revenues represent a significant
portion of a theater's overall profitability. Silver Cinemas' primary concession
products are soft drinks, popcorn, candy and certain other products on a
regional basis. The majority of concession products are generally offered in
three or four sizes. Retail prices are determined according to size as well as
local competition. Concessions revenues are recorded net of applicable sales
taxes.

         In an effort to increase concession sales, Silver Cinemas is constantly
reviewing new products, adjusting pricing, creating convenience and
value-oriented combinations, and continually training concession personnel in
the techniques of up-selling and cross selling. In addition Silver Cinemas has
remodeled concession stands at certain theaters to make them more efficient and
attractive. Theater managers and assistant managers are motivated through
concession commission programs.


         Film Rental Expenses. Film rental fees are paid directly to the film
distribution companies and are directly related to the popularity of a film and
the length of time since that film's release. Film rental costs are calculated
on a percentage of admission revenues and generally decline the longer the film
has been showing. Most terms of film licenses are finalized subsequent to
exhibition of the film in a process known as "settlement." The final terms of
the film licenses consider, among other things, the actual success of a film
relative to original expectations and the exhibitor's relationship with the film
distributor.

         Concession Supplies Expenses. Concession supplies are regularly
purchased in bulk through Silver Cinemas' distributors and vendors. Concession
product is generally ordered weekly from the distributors in order to prevent
the build-up of inventory at the theaters. Concession costs also include the
cost of spoiled and wasted concession inventory.

         Salaries and Wage Expenses. Salaries and wages include payroll taxes,
employee benefits, commissions on concession sales and bonuses for the theater
managers and all theater staff. Typically only the theater manager and the
assistant manager are paid a base salary. The wages paid to the remaining staff
are based on an hourly wage rate.

         Silver Cinemas continually adjusts staffing levels based upon
attendance levels. In order to monitor payroll levels, management measures
salary and wage expense in relation to attendance through payroll per attendee.
For the year ended December 31, 1997, Silver Cinemas experienced payroll per
attendee of $0.49.

         Facility Lease Expenses. Facility lease expenses consist primarily of a
fixed monthly minimum rent payment. In addition, several theater leases contain
contingency rent that is based on a percentage of revenue after such revenue
reaches a certain dollar amount.

         Advertising Expenses. The largest component of advertising costs
consists of daily movie directories placed in local newspapers to advertise
Silver Cinemas' theaters and showtimes. In select 


<PAGE>   24
markets Silver Cinemas participates in "co-op" arrangements whereby the
exhibitors in those markets share the cost of film advertisement in newspapers
with the film distributors. The cost of newspaper ads is generally based on the
size of the directory. Silver Cinemas anticipates lowering advertising costs in
those cities which have multiple theaters as a result of the Acquisitions. The
savings will be realized through consolidating directory ads and receiving
greater purchasing discounts.

         Utilities and Other Expenses. Utilities and other expenses consist
primarily of utilities, insurance, property taxes, repair and maintenance and
cleaning.

         General and Administrative Expenses. General and administrative
expenses are comprised of various expenses related to the management and
operation of its theaters and consist primarily of management and office
salaries, payroll taxes, related employee benefit costs, professional fees,
insurance costs and general office expenses.

         Depreciation and Amortization. Depreciation and amortization expense
includes the depreciation of theater equipment and buildings, the amortization
of theater lease costs, goodwill, and certain non-compete agreements.


<PAGE>   25

LIQUIDITY AND CAPITAL RESOURCES

         Revenues are collected in cash, primarily through box office receipts
and the sale of concession items. Because revenues are received in cash prior to
the payment of related expenses, there is, in effect, no accounts receivable.
This, in combination with minimal inventory requirements, creates a negative
working capital position, which provides certain operating capital.

         During fiscal 1998, the Company's capital requirements were the result
of theater acquisitions, renovation of existing theaters, and the construction
of four theaters. Such capital expenditures were financed with equity sales,
bank borrowings, proceeds from the issuance of senior subordinated notes and
internally generated cash.

         On April 2, 1998, the Company completed the StarTime acquisition of 202
screens at 27 locations pursuant to an asset purchase agreement for
approximately $22.3 million. The theaters acquired from StarTime are second-run
theaters located in Arizona, California, Colorado, Florida, Nebraska, New York,
Ohio, Oklahoma, Texas and Wisconsin. The Company's bank credit facility was used
to finance the purchase of these assets.

         On April 9, 1998, the Company issued $100.0 million of 10 1/2% Senior
Subordinated Notes due 2005 in a private offering (the "Offering"). On April 16,
1998, the Company received the net proceeds from the Offering and a $3.0 equity
investment from DLJ Fund Investment Partners II, L.P. The proceeds



<PAGE>   26

were used to acquire the assets of The Landmark Theatre Group, and repay the
indebtedness under the revolving credit facility, with the remainder of the
proceeds to be used for capital improvements to the Company's existing theaters,
future theater acquisitions and the construction of several identified theaters.

         On April 16, 1998, the Company repaid all of the indebtedness under its
bank credit facility with proceeds from the Offering.

         On April 17, 1998, the Company acquired the assets of Landmark for cash
consideration of approximately $62.5 million pursuant to an asset purchase
agreement. Landmark, with 140 screens at 49 locations, is the largest exhibitor
of specialty motion pictures in the United States, with theaters located in
California, Colorado, Louisiana, Massachusetts, Michigan, Minnesota, Ohio,
Texas, Washington and Wisconsin.

         Also in April 1998, the Company completed the acquisition of 17 screens
at three theaters for approximately $1.6 million from AMC. These theaters
include one specialty-film theater in Michigan and two second-run theaters in
Texas. Proceeds from the Offering and the Company's former bank credit facility
were utilized to fund the acquisition.

         In May 1998, the Company purchased one theater with twelve screens out
of bankruptcy for approximately $3.5 million. The second-run theater, located in
El Paso, Texas was previously owned by Movies One, Inc. Proceeds from the
Offering and internal cash flow were utilized to fund the acquisition.

         In addition to acquisitions during May 1998 the Company completed the
renovation of one of its theaters in Oklahoma. The renovation consisted of
adding stadium seating to two of the five auditoriums for approximately $0.3
million. Also in May 1998, the Company opened two newly constructed six-screen
theaters, which were part of the assets purchased from Landmark. During 1998,
the Company continued with the development of two theaters, one in Michigan and
one in Illinois. The theater in Michigan opened on November 6, 1998.

         In November 1998, Brentwood made an additional equity investment of
$7.5 million in the Company, bringing its aggregate equity investment to
approximately $32.5 million. The proceeds from the issuance of stock by the
Company will be used to continue the Company's new-build expansion program and
for general corporate purposes.

         In the fourth quarter of 1998 the Company spent $1.2 million of capital
improvements for theater upgrades, and $3.2 million for new theater development
and construction. The majority of the expenditures for theater improvements were
utilized to upgrade the recently purchased theaters from Super Saver and
Landmark by replacing seats, adding stereo to auditoriums, replacing floor
coverings and upgrading concession stands. During 1998, the Company has spent
approximately $4.6 million on various theater improvements including the
installation of point of sale units in the theaters and approximately $4.9
million on new theater construction and site development.

         "Same Theater" attendance at the Company's second-run theaters has
declined by approximately 16% over the past year. Management believes this trend
is the result of several factors including the development of megaplexes in
certain markets, changes in film and video release patterns, and the overall
strength of the US economy. If this trend continues, the Company's ability to
generate liquidity could be negatively impacted.

         The preceding statements concerning the attendance declines may
constitute forward-looking statements within the meaning of the federal
securities laws. The Company warns that many factors could, individually or in
aggregate, lead to further declines in theater attendance, including, without
limitation, the following: consumer spending trends and habits; increased
competition in the theater industry; adverse developments in economic factors
influencing the exhibition industry; and lack of demand for films by the general
public. The Company does not expect


<PAGE>   27
to update such forward-looking statements continually as conditions change, and
readers should consider that such statements pertain only to the date hereof.

     In April 1998 the Company obtained a commitment for a $40.0 revolving line
of credit from DLJ Capital Funding, Inc. which expires on June 30, 1999.  The
terms of the commitment were based on assumptions of the business prior to the
acquisitions of Landmark and StarTime in April 1998. Due to recent attendance
trends in the second-run segment, which have impacted the Company's performance,
the terms of the commitment are no longer economically beneficial. Therefore,
the Company does not anticipate entering into a revolving credit facility under
the existing terms. As such, Donaldson, Lufkin & Jenrette has been retained to
evaluate potential alternative sources of capital to complete the Company's
new-build program, pursue selected acquisitions and for general corporate
purposes.

     As of December 31, 1998, the Company had $2.8 million of Series A Preferred
Stock dividends in arrears.

INFLATION

     Inflation has not had a significant impact on the Company's operations to
date.

SEASONALITY

     The Company's quarterly results of operations tend to be affected by film
release patterns by producers and distributors, and the commercial success of
films. In the past the year-end holiday season and the summer resulted in
higher-than-average quarterly revenues for the Company.

YEAR 2000

     The "Year 2000 Issue" is the result of computer programs that use two
digits instead of four to record the applicable year. Computer programs that
have date-sensitive software might recognize a date using "00" as the Year 1900
instead of the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other events,
a temporary inability to process transactions or engage in similar normal
business activities. The Year 2000 is a leap year, which may also lead to
incorrect calculations, functions or system failure. The Company has established
a committee, which is currently gathering, testing and producing information
about the Company's operations systems impacted by the Year 2000 transition. At
the present time, the Company has completed its assessment of the day-to-day
operating and reporting systems for all theaters and has contacted the various
vendors to ensure that all necessary modifications and upgrades will be
available for implementation by June 30, 1999. The projects to modify the
existing systems to ensure Year 2000 compliance are expected to be completed by
September 30, 1999. Related costs are not anticipated to exceed [$0.1] million
at the completion of the project. The Company's financial reporting and
operational databases associated with the corporate offices have been tested,
and modified as needed to ensure compliance with the Year 2000.

     The Company is still in the assessment phase with respect to its
significant suppliers and critical business partners to determine the extent to
which the Company may be vulnerable in the event that those parties fail to
properly remediate their own Year 2000 issues. The major third party vendors
include financial institutions, utility suppliers, providers of communication
services and parties that provide goods or services that are essential to the
Company's operations. While the Company is not presently aware of any such
significant exposure, there can be no guarantees that the systems of
third-parties on which the Company relies will be converted in a timely manner,
or that failure to properly convert by another company would not have a material
adverse effect on the Company. The Company is in the process of formulating a
contingency plan in the event that a significant exposure is identified relative
to the dependencies on third party systems and anticipates completion by
September 30, 1999.
<PAGE>   28
Although the Year 2000 assessment has not been completed, management currently
believes, based on available information, that resolving these matters will not
have a material adverse impact on the Company's financial position, results of
operations or cash flows.

         The preceding statements concerning the Company's efforts and
management's expectations, relating to year 2000 compliance and the incremental
costs associated therewith may constitute forward-looking statements within the
meaning of the federal securities laws. The Company warns that many factors
could, individually or in aggregate, adversely impact the company's ability to
achieve year 2000 compliance including without limitation, the availability and
costs of programming and testing resources, vendors' ability to modify
proprietary software and unanticipated problems identified in the ongoing
compliance review. The Company does not expect to update such forward-looking
statements continually as conditions change, and readers should consider that
such statements pertain only to the date hereof.


ITEM 7 (a). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         The Company uses fixed rate debt to partially finance budgeted
expenditures. These agreements expose the Company to market risk associated
with changes in interest rates. The Company does not hold or issue derivative
financial instruments for trading purposes.                            

         The following table presents the carrying and fair value at December
31, 1998 of the Company's debt along with its interest rates. Fair value is
determined as the quoted price of the financial instrument.
         
<TABLE>
<CAPTION>
               Expected
               Maturity                                                                       Fair
               Date                                2003                  Total                Value
<S>                                                <C>                   <C>                 <C>

               Fixed Rate
               Debt                                $100,000,000          $100,000,000        $83,000,000

               Interest
               Rate         10.5%
</TABLE>

ITEM 8.  FINANCIAL STATEMENTS

         The financial statements are listed on the Index at F-1. Such
financial statements are included herein beginning on page F-3
             
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.


<PAGE>   29
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The following sets forth certain information, regarding the executive
officers and directors of the Company:

<TABLE>
<CAPTION>
             Name                     Age                              Position
-------------------------------     --------    -------------------------------------------------------
<S>                                   <C>       <C>
Steven L. Holmes                      40        President, Chief Executive Officer, Chief Financial
                                                Officer and Director
John M. Sullivan                      63        Chairman of the Board of Directors
Bert Manzari                          53        Director
Ron Reid                              57        Executive Vice President, Operations
Paul Richardson                       50        Executive Vice President
Paul Ledbetter                        42        Vice President, General Counsel
Stephen Kauzlaric                     33        Vice President, Treasurer
David H. Wong                         35        Director
Christopher A. Laurence               31        Director
James Rosenthal                       35        Director
Thomas E. Davin                       41        Director
</TABLE>

         Steven L. Holmes, President, Chief Executive Officer, Chief Financial
Officer and Director. Mr. Holmes is a co-founder of the Company, and has served
as Chief Executive Officer, Chief Financial Officer and Director since the
Company's inception. Prior to joining the Company, from 1993 to 1996, Mr. Holmes
served as Chief Financial Officer of Cobblestone Golf Group ("Cobblestone").
Prior to his employment with Cobblestone, Mr. Holmes served as a Director and
Chief Financial Officer of Cinemark USA, Inc. ("Cinemark"). Prior to joining
Cinemark, Mr. Holmes was a manager at Deloitte & Touche LLP.

         John M. Sullivan, Chairman of the Board of Directors. Mr. Sullivan has
served as a Chairman of the Board of Directors of the Company since its
inception in June 1996. He is presently a director of The Scotts Company and
Rental Service Corporation. From October 1987 to January 1993, Mr. Sullivan was
Chairman of the Board and Chief Executive Officer of Prince Holdings, Inc.

         Bert Manzari, Director. Mr. Manzari served as President of Landmark
from April 1998 to February 1999 and has been a director of the Company since
April 1998. Prior to joining the Company, Mr. Manzari served as Senior Vice
President, Head Film Buyer of Landmark since 1982. Prior to joining Landmark,
Mr. Manzari was President and Head Film Buyer for Seven Gables Theaters, a
northwestern theatre circuit located in Seattle, Washington. Prior to that time,
Mr. Manzari opened the Guild Theatre in Albuquerque in 1974, where Mr. Manzari
and Paul Richardson expanded this holding into Movie, Inc., a circuit of 13
repertory screens in the south and southwestern parts of the United States.

         Ron Reid, Executive Vice President, Operations. Mr. Reid has served as
Executive Vice President of Operations since December 1996. Prior to joining the
Company, Mr. Reid served as Vice President of Construction and Purchasing,
Worldwide for Cinemark from 1988 to 1996. Prior to that time, Mr. Reid served as
Cinemark's Western Region Operations Manager from 1987 to 1988. Prior to joining
Cinemark, Mr. Reid held the position of Director of Operations, overseeing
concessions, construction and personnel for Theatre Operators, Inc. for eight
years.

         Paul Richardson, Executive Vice President. Mr. Richardson has served as
Executive Vice President of the Company since April 1998. Prior to joining the
Company, Mr. Richardson served as Senior Vice-


<PAGE>   30

President of Operations of Landmark from 1982 to 1998. Prior to joining
Landmark, Mr. Richardson owned and operated Movie, Inc., a circuit of 13
repertory screens in the south and southwestern parts of the United States. Mr.
Richardson is responsible for the acquisition and design of Landmark's theaters.

         Paul A. Ledbetter, Vice President, General Counsel. Mr. Ledbetter has
served as the Company's Vice President, General Counsel, since July 1998. Prior
to joining the Company, Mr. Ledbetter was Vice President, General Counsel for
MEPC American Properties. Prior to joining MEPC American Properties, Mr.
Ledbetter was with the law firm Akin, Gump, Strauss, Hauer & Feld, LLP in the
Dallas office engaged primarily in the real estate and real estate financing
section of the firm.

         Stephen Kauzlaric, Vice President, Treasurer. Mr. Kauzlaric has served
as the Company's Vice President, Treasurer, since September 1997. Prior to
joining the Company, Mr. Kauzlaric held several positions with Cobblestone,
including Director of Strategic Planning and Director of Acquisitions. Prior to
joining Cobblestone, Mr. Kauzlaric was an Assistant Vice President at First
Interstate Bank in the real estate developer lending department.

         David H. Wong, Director. Mr. Wong has served as a director of the
Company since its inception in June 1996. Mr. Wong joined Brentwood in July 1989
and is presently a general partner of Brentwood, Brentwood Buyout Management
Partners, L.P. and Brentwood Buyout Partners, L.P. and is a managing member of
Brentwood Private Equity, L.L.C. and Brentwood Private Equity Management, L.L.C.
Mr. Wong is also a director of Aspen Marketing Group, Inc.

         Christopher A. Laurence, Director. Mr. Laurence has served as a
director of the Company since its inception in June 1996. Mr. Laurence joined
Brentwood in 1991 and is presently a managing member of Brentwood Private
Equity, L.L.C. and Brentwood Private Equity Management, L.L.C. Mr. Laurence is
also a director of Rental Service Corporation, Aspen Marketing Group, Inc., HDA
Parts System, Inc. and Worldpoint Logistics, Inc.

         James Rosenthal, Director. Mr. Rosenthal has served as a Director of
the Company since its inception in June 1996. Mr. Rosenthal also serves as
Executive Vice President of Business Development for New Line Cinema
Corporation, a position he has held since 1992. In his capacity at New Line, Mr.
Rosenthal focuses on new business opportunities, mergers and acquisitions,
finance, and joint ventures. Prior to this time, Mr. Rosenthal was a Senior
Associate with the management consulting firm Booz, Allen & Hamilton.

         Thomas E. Davin, Director. Thomas E. Davin has served as a director of
the Company since March 1998. In June 1997 he was appointed Chief Operating
Officer for Taco Bell Corp. Mr. Davin joined Taco Bell Corp. in November 1993 as
Vice President and General Manager for the South Central Region. In September
1996, he was named Vice President of Operations. Prior to joining Taco Bell
Corp. and since October 1991, Mr. Davin served as Director, Mergers and
Acquisitions for PepsiCo. Inc.


<PAGE>   31


ITEM 11. EXECUTIVE COMPENSATION

         The following table sets forth the total compensation paid by the
Company to its five most highly compensated officers.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                                                                              Total
Name and Principal Position                                 Year            Salary           Bonus            Other
--------------------------------------------------------    --------     -------------    -------------     -----------
<S>                                                         <C>          <C>              <C>               <C>        
Steven L. Holmes
Chief Executive Officer, Chief Financial Officer            1998             $153,974          $54,000       $9,978 (a)
                                                            1997              146,222           42,635        7,800 (b)
Thomas J. Owens (1)
President                                                   1998             $251,582          $54,000       $9,941 (c)
                                                            1997              144,865           39,792        7,800 (d)

Bert Manzari (2)
President of Landmark                                       1998             $229,615         $152,175       $2,219 (e)
                                                            1997                   --               --           --

Ron Reid
Executive Vice President, Operations                        1998             $150,237          $47,000       $8,524 (f)
                                                            1997              142,770           26,125        6,000 (g)

Paul Richardson
Executive Vice President                                    1998             $198,404          $18,000       $3,119 (h)
                                                            1997                   --               --           --
</TABLE>

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

(a)      Includes $2,178 annual contribution to the Company's 401(k) savings
         plan and a $7,800 annual car allowance.

(b)      Includes a $7,800 annual car allowance.

(c)      Includes $2,141 annual contribution to the Company's 401(k) savings
         plan and a $7,800 annual car allowance.

(d)      Includes a $7,800 annual car allowance.

(e)      Includes a $2,219 allowance for family health insurance.

(f)      Includes $2,524 annual contribution to the Company's 401(k) savings
         plan and a $6,000 annual car allowance.

(g)      Includes a $6,000 annual car allowance.

(h)      Includes a $3,119 allowance for family health insurance.

(1)      Mr. Owens resigned as President and Director of the Company effective
         January 12, 1999.

(2)      Mr. Manzari resigned as President of Landmark effective February 15,
         1999.

EMPLOYMENT ARRANGEMENTS

      In connection with the Landmark Acquisition, the Company assumed the
employment agreement of Mr. Richardson. Pursuant to such agreements and the
amendments thereto, Mr. Richardson is entitled to receive certain compensation
and benefits through the term of his agreement as well as upon the termination
of his respective agreement prior to the expiration of such term.

      Mr. Richardson, Executive Vice President, currently receives a salary of
$285,000 per year and is eligible to receive a bonus based upon new theater
openings. His employment agreement provides that his salary is subject to
increase based on the Consumer Price Index after March 31, 1999. In addition, he
was given the opportunity to purchase 1000 shares of the Company's common stock.
The term of his agreement expires on March 31, 2001.


<PAGE>   32
COMPENSATION OF DIRECTORS

         Members of the Board of Directors of the Company do not receive any
compensation for their services as directors. They do receive reimbursement for
travel and other expenses incurred in their capacity as directors.



<PAGE>   33

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        The Company has two classes of voting securities, Common Stock and
preferred stock designated as voting Series A Preferred Stock ("Series A
Preferred Stock"). The Common Stock and Series A Preferred Stock vote together
as a single class. The following table sets forth, as of March 22, 1999, the
ownership of Common Stock and Series A Preferred Stock of the Company by each
stockholder who is known by the Company to own beneficially more than five
percent of the outstanding Common Stock or Series A Preferred Stock,
respectively, by each director, by each executive officer listed in the table
below, and by all directors and officers as a group

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Name and Address                 Common Stock Amount    Percent     Series A Preferred Stock   Percent    Percent of all
                                    and Nature of       of Class      Amount and Nature of     of Class       voting
                                 Beneficial Ownership                 Beneficial Ownership                  Securities
--------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                    <C>         <C>                        <C>         <C>  
Brentwood Associates                    106,613          75.9%               323,934            90.0%          86.1%
    Buyout Fund II, L.P.(1)                                                                             
DLJ Fund Investment Partners             12,151            8.7                29,878              8.3            8.4
    II, L.P.(2)                                                                                         
Steven L. Holmes(3)                       6,400            4.6                   936              0.3            1.5
Ron Reid(3)                               3,164            2.3                   468              0.1            0.7
John M. Sullivan(1)                       1,328            1.0                   987              0.2            0.5
Stephen Kauzlaric(3)                      1,000            0.7                     0                0            0.2
Paul Richardson(4)                        1,000            0.7                     0                0            0.2
James Rosenthal(1)                          628            0.4                   994              0.3            0.3
Tom Davin(1)                                546            0.4                   745              0.2            0.3
David H. Wong (1)(5)                    106,613           75.9               323,934             90.0           86.1
Christopher A. Laurence (1)(5)          106,613           75.9               323,934             90.0           86.1
All Directors and Officers               14,066           10.0                 4,130              1.1            3.6
as a group (eight individuals)                                                                  
</TABLE>

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

(1)      The address for Brentwood Associates Buyout Fund II, L.P. and Messrs.
         Davin, Sullivan and Rosenthal is c/o Brentwood Associates, 11150 Santa
         Monica Boulevard, Suite 1200, Los Angeles, California 90025.

(2)      The address for DLJ Fund Investment Partners II, L.P. is 277 Park
         Avenue, New York, New York 10172.

(3)      The address for Messrs. Holmes, Kauzlaric and Reid is c/o Silver
         Cinemas International, Inc., 4004 Beltline Road, Suite 205, Addison,
         Texas 75001.

(4)      The address for Mr. Richardson is c/o Landmark Theater Corp. 2222 S.
         Barrington Avenue, Los Angeles, California 90064.

(5)      Includes 106,613 shares of Common Stock and 323,934 shares of Series A
         Preferred Stock held by Brentwood Associates Buyout Fund II, L.P. Each
         of Messrs. Wong and Laurence are managing members of the general
         partner of Brentwood Associates Buyout Fund II, L.P. and may be deemed
         to share investment and voting control over the shares of Common Stock
         and Series A Preferred Stock owned by Brentwood Associates Buyout Fund
         II, L.P. Each of Messrs. Wong and Laurence disclaims beneficial
         ownership of such shares.

<PAGE>   34


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Pursuant to a Corporate Development and Administrative Services
Agreement, dated as of July 2, 1996, between Brentwood Private Equity LLC
("BPE"), an affiliate of Brentwood, and the Company, as amended (the "Services
Agreement"), BPE has agreed to assist in the corporate development activities of
the Company by providing services to the Company, including (i) assistance in
analyzing, structuring and negotiating the terms of investments and
acquisitions, (ii) researching, identifying, contacting, meeting and negotiating
with prospective sources of debt and equity financing, (iii) preparing,
coordinating and conducting presentations to prospective sources of debt and
equity financing, (iv) assistance in structuring and establishing the terms of
debt and equity financing and (v) assistance and advice in connection with the
preparation of the Company's financial and operating plans. Pursuant to the
Services Agreement, BPE is entitled to receive: (i) financial advisory fees
equal to 1.5% of the acquisition cost of the Company's completed acquisitions;
(ii) upon the occurrence of certain events, monitoring fees equal to 1% of the
aggregate amount of investment in Company by Brentwood; and (iii) reimbursement
of its reasonable fees and expenses incurred from time to time (a) in performing
the services rendered thereunder and (b) in connection with any investment in,
financing of, or sale, distribution or transfer of any interest in the Company
by BPE or any person or entity associated with BPE. For the years ended December
31, 1998 and December 31, 1997, BPE was paid $1,466,840 and $81,505,
respectively, (including reimbursement of fees and expenses) pursuant to the
Services Agreement.

STOCKHOLDERS AGREEMENT

         The Company and its stockholders (the "Stockholders") have entered into
a stockholders agreement (the "Stockholders Agreement") which provides certain
restrictions and rights related to the transfer, sale or purchase of Common
Stock and Series A Preferred Stock (collectively, the "Company Stock"). Such
restrictions and rights include the following: (i) except as set forth below, a
Stockholder may not sell or transfer any shares of the Company Stock without
first giving the Company the right of first refusal to purchase such shares;
(ii) in the event that Brentwood agrees to sell or transfer any of its shares of
Common Stock, the other Stockholders shall have the right to sell or transfer a
proportionate number of shares of Company Stock as part of such sale or
transfer; and (iii) in the event that Brentwood agrees to sell or transfer all
of its shares of Company Stock, the other Stockholders shall be obligated to
sell or transfer all of their shares of Company Stock as part of such sale or
transfer. In connection with the Stockholders Agreement, the Company and the
Stockholders have entered into a registration rights agreement which provides
that the Stockholders would have certain piggyback rights upon the registration
for a public offering of the Company Stock by the Company.
<PAGE>   35


                                     PART IV

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

(a)      Documents filed as part of this Report.

1.       The financial statements listed in the accompanying Index beginning on
         F-1 are filed as a part of this report.

(b)      Reports on Form 8-K

         On Form 8-Ks dated November 3, 1998 and January 12, 1999, under Item 5.
Other Events, the Company filed a press release announcing a $7.5 million equity
investment by Brentwood and announced the resignation of Thomas. J. Owens from
the positions of President and Director of Silver cinemas International, Inc.

(c)      Exhibits

         27 - Financial Data Schedule

(d)      Financial Statement Schedules.

         None. Schedules are omitted because of the absence of the conditions
under which they are required or because the information required by such
omitted schedules is set forth in the financial statements or the notes thereto.


<PAGE>   36


                                   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.

Dated:  March 31, 1999

                                            SILVER CINEMAS INTERNATIONAL, INC.


                                            BY:        /s/  Steven L. Holmes
                                               --------------------------------
                                                        Steven L. Holmes
                                              Chief Executive Officer, President
                                                   and Chief Financial Officer


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>
               NAME                                           TITLE                               DATE
<S>                                         <C>                                              <C>
      /s/ Steven L. Holmes                  Chief Executive Officer, President, Chief        March 31, 1999
-------------------------------------            Financial Officer and Director
         Steven L. Holmes                        

      /s/  John M. Sullivan                    Chairman of the Board of Directors            March 31, 1999
-------------------------------------
         John M. Sullivan

        /s/ E.L. Manzari                                    Director                         March 31, 1999
-------------------------------------
           E.L. Manzari

        /s/David H. Wong                                    Director                         March 31, 1999
-------------------------------------
          David H. Wong

   /s/Christopher A. Laurence                               Director                         March 31, 1999
-------------------------------------
     Christopher A. Laurence

       /s/James Rosenthal                                   Director                         March 31, 1999
-------------------------------------
         James Rosenthal

       /s/Thomas E. Davin                                   Director                         March 31, 1999
-------------------------------------
         Thomas E. Davin
</TABLE>

<PAGE>   37


INDEX TO FINANCIAL STATEMENTS

(ITEMS 8 AND 14 OF FORM 10-K)

<TABLE>
<CAPTION>
                                                                                                       Page
                                                                                                       ----
<S>                                                                                                    <C>
INDEPENDENT AUDITORS' REPORT............................................................................F-2

CONSOLIDATED FINANCIAL STATEMENTS AND NOTES:

Consolidated Balance Sheets, December 31, 1998 and 1997.................................................F-3

Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997
    and the Period from May 10, 1996 (Date of Inception) to December 31, 1996...........................F-4

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998 and 1997
    and the Period from May 10, 1996 (Date of Inception) to December 31, 1996...........................F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997
    and the Period from May 10, 1996 (Date of Inception) to December 31, 1996...........................F-6

Notes to Consolidated Financial Statements..............................................................F-7
</TABLE>





                                      F-1
<PAGE>   38
INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of
   Silver Cinemas International, Inc.

We have audited the accompanying consolidated balance sheets of Silver Cinemas
International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1998 and 1997 and for the period from May
10, 1996 (date of inception) to December 31, 1996. 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.

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 provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Silver Cinemas International, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997
and for the period from May 10, 1996 (date of inception) to December 31, 1996,
in conformity with generally accepted accounting principles.



DELOITTE & TOUCHE LLP

Dallas, Texas
March 26, 1999




                                      F-2
<PAGE>   39


CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
ASSETS                                                                                            1998              1997
<S>                                                                                          <C>             <C>          
CURRENT ASSETS:
   Cash and cash equivalents                                                                 $   2,880,955   $     276,497
   Inventories                                                                                     560,886         147,792
   Receivables                                                                                   1,210,328         264,601
                                                                                             -------------   -------------

           Total current assets                                                                  4,652,169         688,890

THEATER PROPERTIES AND EQUIPMENT - Net                                                          66,913,041       8,688,424

GOODWILL - NET (Note 2)                                                                         49,981,350      10,023,423

OTHER ASSETS - NET (Note 4)                                                                     10,845,858       2,526,562
                                                                                             -------------   -------------

TOTAL                                                                                        $ 132,392,418   $  21,927,299
                                                                                             =============   =============


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current portion of long-term debt                                                         $     110,000   $       6,448
   Current portion of capital lease obligations                                                    306,284
   Accounts payable                                                                                522,733          42,599
   Accrued film rentals                                                                          2,098,791         240,170
   Accrued payrolls                                                                              1,190,914         282,348
   Accrued property taxes and other liabilities                                                  1,646,509       1,068,223
   Accrued interest                                                                              2,209,500          63,903
                                                                                             -------------   -------------

           Total current  liabilities                                                            8,084,731       1,703,691

LONG-TERM DEBT, less current portion                                                           100,110,000       6,590,561

CAPITAL LEASE OBLIGATIONS, less current obligations                                              4,414,299

OTHER LONG-TERM OBLIGATIONS                                                                      2,198,380

COMMITMENTS AND CONTINGENCIES (SEE NOTES)

STOCKHOLDERS' EQUITY:
   Series preferred stock, 100,000 shares authorized, no shares issued
   Series A preferred stock, $.01 par value, 400,000 shares authorized, 359,874 and 152,038
      shares issued and outstanding at December 31, 1998 and 1997, respectively                 35,987,442      15,203,800
   Common stock, $.01 par value; 200,000 shares authorized, 140,458 and 100,784 shares
      issued and outstanding at December 31, 1998 and 1997, respectively                             1,405           1,008
   Additional paid-in capital                                                                      139,053          99,712
   Stockholder notes receivable                                                                   (201,780)       (116,079)
   Accumulated deficit                                                                         (18,341,112)     (1,555,394)
                                                                                             -------------   -------------

           Total stockholders' equity                                                           17,585,008      13,633,047
                                                                                             -------------   -------------

TOTAL                                                                                        $ 132,392,418   $  21,927,299
                                                                                             =============   =============
</TABLE>


See notes to consolidated financial statements.




                                      F-3
<PAGE>   40

SILVER CINEMAS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                               PERIOD FROM
                                                                               MAY 10, 1996
                                                     YEAR ENDED            (DATE OF INCEPTION)
                                                     DECEMBER 31,             TO DECEMBER 31,
                                           ------------------------------- -------------------
                                                1998             1997             1996
<S>                                        <C>              <C>              <C>           
REVENUES:
   Admissions                              $   52,126,518   $   10,367,555   $      787,291
   Concessions                                 23,622,616        8,097,921          609,634
   Other                                        1,466,747          296,102           23,005
                                           --------------   --------------   --------------

           Total                               77,215,881       18,761,578        1,419,930

COSTS AND EXPENSES:
   Cost of operations:
      Film rentals                             21,399,319        4,483,842          378,199
      Concession supplies                       3,845,095        1,462,163          110,875
      Salaries and wages                       13,456,371        3,064,974          275,754
      Facility leases                          13,679,253        3,311,740          207,339
      Advertising                               3,402,350          755,337           46,155
      Utilities and other                      11,995,773        3,024,285          200,786
   General and administrative expenses          6,271,867        1,900,892          576,574
   Depreciation and amortization                6,507,118        1,479,090          102,896
   Asset impairment charges                     4,580,000
                                           --------------   --------------   --------------
           Total                               85,137,146       19,482,323        1,898,578
                                           --------------   --------------   --------------

OPERATING LOSS                                 (7,921,265)        (720,745)        (478,648)

OTHER INCOME (EXPENSE):
   Interest expense                            (7,940,021)        (352,509)
   Amortization of debt issue costs            (1,469,115)         (54,907)
   Interest income and other expense, net         544,683          (45,026)          96,441
                                           --------------   --------------   --------------

           Total                               (8,864,453)        (452,442)          96,441
                                           --------------   --------------   --------------

NET LOSS                                      (16,785,718)      (1,173,187)        (382,207)

PREFERRED STOCK DIVIDENDS                      (1,563,104)        (911,328)        (301,803)
                                           --------------   --------------   --------------

NET LOSS APPLICABLE TO COMMON STOCK        $  (18,348,822)  $   (2,084,515)  $     (684,010)
                                           ==============   ==============   ==============
</TABLE>


See notes to consolidated financial statements.






                                      F-4
<PAGE>   41

SILVER CINEMAS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 10, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996


<TABLE>
<CAPTION>
                                   SERIES A                 
                                PREFERRED STOCK           COMMON STOCK
                            ------------------------   -----------------  ADDITIONAL  STOCKHOLDER
                              SHARES                    SHARES              PAID-IN       NOTES      ACCUMULATED                 
                              ISSUED        AMOUNT      ISSUED   AMOUNT     CAPITAL     RECEIVABLE      DEFICIT        TOTAL     
                            ----------   -----------   -------  --------  ----------  -----------    ------------   ------------ 
<S>                         <C>          <C>            <C>     <C>       <C>         <C>            <C>            <C>          
Capital stock issuance         151,739   $15,173,900    98,320  $    983  $   97,295  $  (151,210)   $       --     $ 15,120,968 
                                                                                                                                 
Net loss                                                                                                 (382,207)      (382,207)
                                                                                       
Payment of stockholder                                                                                                           
 notes receivable                                                                          34,774                         34,774 
                            ----------   -----------   -------  --------  ----------  -----------    ------------   ------------ 
                                                                                                                                 
BALANCE, DECEMBER 31, 1996     151,739    15,173,900    98,320       983      97,295     (116,436)       (382,207)    14,773,535 
                                                                                                                                 
Capital stock issuance             299        29,900     2,464        25       2,417                                      32,342 
                                                                                                                                 
Net loss                                                                                               (1,173,187)    (1,173,187)
                                                                                       
Payment of stockholder                                                                                                           
 notes receivable                                                                             357                            357 
                            ----------   -----------   -------  --------  ----------  -----------    ------------   ------------ 
                                                                                                                                 
BALANCE, DECEMBER 31, 1997     152,038    15,203,800   100,784     1,008      99,712     (116,079)     (1,555,394)    13,633,047 
                                                                                                                                 
Capital stock issuance         207,836    20,783,642    39,674       397      39,341      (98,790)                    20,724,590 
                                                                                                                                 
Net loss                                                                                              (16,785,718)   (16,785,718)
                                                                                       
Payment of stockholder                                                                                                           
 notes receivable                                                                          13,089                         13,089 
                            ----------   -----------   -------  --------  ----------  -----------    ------------   ------------ 
                                                                                                                                 
BALANCE, DECEMBER 31, 1998     359,874   $35,987,442   140,458  $  1,405  $  139,053  $  (201,780)   $(18,341,112)  $ 17,585,008 
                            ==========   ===========   =======  ========  ==========  ===========    ============   ============ 
</TABLE>


See notes to consolidated financial statements.



                                      F-5
<PAGE>   42

SILVER CINEMAS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                      PERIOD FROM
                                                             YEAR ENDED               MAY 10, 1996
                                                             DECEMBER 31,          (DATE OF INCEPTION)
                                                     -----------------------------   TO DECEMBER 31, 
                                                         1998            1997            1996
                                                     -------------   -------------   -------------
<S>                                                  <C>             <C>             <C>           
OPERATING ACTIVITIES:
   Net loss                                          $ (16,785,718)  $  (1,173,187)  $    (382,207)
   Noncash items in net loss:
      Depreciation and amortization                      7,976,233         642,259          39,179
      Asset impairment charges                           4,580,000         891,738          63,717
   Cash from (used for) working capital:
      Inventories                                          (79,498)        (23,705)
      Receivables and other                                170,423        (224,013)        (40,588)
      Accounts payable                                     151,470        (160,623)        203,845
      Accrued liabilities                                   52,003         804,685         849,336
                                                     -------------   -------------   -------------

           Net cash (used for) operating activities     (3,935,087)        757,154         733,282
                                                     -------------   -------------   -------------

INVESTING ACTIVITIES:
   Acquisitions of theater properties and equipment    (89,962,008)     (4,212,426)    (12,386,187)
   Additions to theater properties and equipment        (7,933,542)     (4,555,736)       (181,707)
   Increase in other assets                             (4,650,466)       (278,710)       (611,673)
                                                     -------------   -------------   -------------

           Net cash used for investing activities     (102,546,016)     (9,046,872)    (13,179,567)
                                                     -------------   -------------   -------------

FINANCING ACTIVITIES:
   Proceeds from the issuance of debt                  100,000,000       6,600,000       2,000,000
   Payments of debt and capital leases                  (6,884,786)     (2,002,991)
   Decrease in other long-term obligations                (221,029)
   Increase in debt issue costs                         (4,546,303)       (772,950)
   Proceeds from the issuance of stock                  20,724,590          32,342      15,120,968
   Payments on stockholder notes receivable                 13,089             357          34,774
                                                     -------------   -------------   -------------

           Net cash from financing activities          109,085,561       3,856,758      17,155,742
                                                     -------------   -------------   -------------

INCREASE (DECREASE) IN CASH AND
   CASH EQUIVALENTS                                      2,604,458      (4,432,960)      4,709,457

CASH AND CASH EQUIVALENTS:
   Beginning of period                                     276,497       4,709,457
                                                     -------------   -------------   -------------

   End of period                                     $   2,880,955   $     276,497   $   4,709,457
                                                     =============   =============   =============

SUPPLEMENTAL INFORMATION:
   Stock issued for notes receivable                 $      98,790   $               $     151,210
                                                     =============   =============   =============

   Cash paid for interest                            $   5,794,424   $     261,607   $
                                                     =============   =============   =============
</TABLE>

See notes to consolidated financial statements.



                                      F-6
<PAGE>   43



SILVER CINEMAS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    SIGNIFICANT ACCOUNTING POLICIES

      PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
      include the accounts of Silver Cinemas International, Inc. and its
      subsidiaries (collectively referred to as the "Company"). All intercompany
      accounts and transactions have been eliminated.

      BUSINESS - The Company owns or leases and operates 105 motion picture
      theaters (534 screens) in 19 states and manages 1 theater (1 screen) for
      another party at December 31, 1998.

      MANAGEMENT ESTIMATES - In preparing the financial statements, management
      is required to make estimates and assumptions that affect the reported
      amounts of assets and liabilities as of the date of the financial
      statements and revenues and expenses for the period. Actual results could
      differ significantly from those estimates.

      REVENUES are recognized when admissions and concessions sales are received
      at the theaters. Film rental costs are accrued based on the applicable box
      office receipts and the terms of the film licenses.

      CASH AND CASH EQUIVALENTS consist of operating funds held in financial
      institutions, petty cash held by the theaters and highly liquid
      investments with original maturities of three months or less when
      purchased.

      INVENTORIES of concession products are stated at the lower of cost
      (first-in, first-out method) or market.

      THEATER PROPERTIES AND EQUIPMENT are stated at cost assigned primarily as
      part of the acquisitions (see Note 2) less accumulated depreciation and
      amortization. Depreciation is provided using the straight-line method over
      the estimated useful lives of the assets as follows: buildings - 20 years
      and theater furniture and equipment - 10 years. Leasehold interests and
      improvements are amortized using the straight-line method over the lesser
      of the lease period or the estimated useful lives of the leasehold
      improvements.

      GOODWILL is amortized on a straight-line basis over a 20-year period.

      LONG-LIVED ASSETS and certain identifiable intangibles are reviewed by the
      Company for impairment whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be recoverable.
      Recoverability of assets to be held and used is measured by a comparison
      of the carrying amount of an asset to the future undiscounted cash flows
      without interest costs expected to be generated by the asset. If the
      carrying value of the assets exceeds the expected future cash flows, an
      impairment exists and is measured by the amount by which the carrying
      amount of the assets exceeds the estimated fair value of the assets.
      Assets to be disposed of are reported at the lower of the carrying amount
      or fair value less costs to sell. Considerable management judgment is
      necessary to estimate cash flows and expected fair values. Accordingly, it
      is reasonably possible that actual results could vary significantly from
      such estimates.



                                      F-7
<PAGE>   44

      OTHER ASSETS, as applicable, are amortized using the straight-line method
      over five years, and over the three to seven year terms of the noncompete
      and debt agreements.

      ADVERTISING COSTS are expensed when incurred.

      DEFERRED INCOME TAXES are provided under the liability method for
      temporary differences between revenue and expenses recognized for tax
      return and financial reporting purposes.

      RECENT ACCOUNTING PRONOUNCEMENTS - In February 1997, the FASB issued SFAS
      No. 129, "Disclosure of Information About Capital Structure," which
      establishes standards for disclosing information about an entity's capital
      structure and is effective for financial statements for periods ending
      after December 15, 1997. In June 1997, the FASB issued SFAS No. 130,
      "Reporting Comprehensive Income," which establishes standards for
      reporting and display of comprehensive income and its components in the
      financial statements for fiscal years beginning after December 15, 1997.
      The FASB also issued, in June 1997, SFAS No. 131, "Disclosures About
      Segments of an Enterprise and Related Information," which establishes
      standards for the way public companies disclose information about
      operating segments, products and services, geographic areas and major
      customers. SFAS No. 131 is effective for financial statements for periods
      beginning after December 15, 1997. In June 1998, the FASB issued SFAS No.
      133, "Accounting for Derivative Instruments and Hedging Activities," which
      is effective for fiscal quarters ending after June 15, 1999.

      The Company had made the disclosures under SFAS No. 129 and 131. In
      accordance with SFAS 130, the Company has determined that comprehensive
      loss is the same as net loss. The Company does not expect the adoption of
      SFAS no. 133 to have a material impact on its financial statements. The
      Company will continue to review these statements over time to determine if
      any additional disclosures are necessary based on evolving circumstances.

      RECLASSIFICATIONS have been made to prior period amounts to conform with
      the 1998 presentation.



                                      F-8
<PAGE>   45

2.    ACQUISITIONS

      In separate transactions, the Company acquired certain assets and
      businesses as follows:

<TABLE>
<CAPTION>
                              APPROXIMATE              NUMBER              NUMBER             
                                PURCHASE                  OF                 OF           EFFECTIVE
      SELLER                     PRICE                 THEATERS            SCREENS          DATE
<S>                          <C>                           <C>                <C>                <C> 
       1996

        A                    $     580,693                 4                  22        November 1996
        B                       11,805,494                14                  80        November 1996
                             -------------               ---                 ---

                             $  12,386,187                18                 102
                             =============               ===                ===

       1997

        C                    $     370,231                 1                   6        January 1997
        D                        2,710,889                 2                  19        January 1997
        E                        1,097,200                 2                  12        April 1997
        F                           34,106                 1                   4        May 1997
                             -------------               ---                 ---

                             $  4,212,426                  6                  41
                             =============               ===                 ==

       1998

        G                    $   1,608,398                 3                  17        March 1998
        H                       22,335,810                27                 202        April 1998
        I                       62,523,136                49                 140        April 1998
        J                        3,494,664                 1                  12        May 1998
                             -------------               ---                 ---

                             $  89,962,008                80                 371
                             =============               ===                ===
</TABLE>


      The Company's acquisitions have been accounted for under the purchase
      method of accounting. Under the purchase method of accounting, the results
      of operations of the acquired businesses are included in the accompanying
      consolidated financial statements as of their respective acquisition
      dates. The assets and liabilities of acquired businesses are included
      based on an allocation of the purchase price as follows:

<TABLE>
<CAPTION>
                                              1998           1997          1996
                                          ------------   ------------  ------------
<S>                                       <C>            <C>           <C>         
Inventories                               $    333,596   $     23,577  $    100,512
Theater properties and equipment            56,029,299      1,414,099     3,218,017
Noncompete agreements                          776,440        250,000     1,000,000
Goodwill                                    44,906,145      2,524,750     8,067,658
Other                                        1,262,261
Accounts payable and accrued liabilities   (13,345,733)
                                          ------------   ------------  ------------

                                          $ 89,962,008   $  4,212,426  $ 12,386,187
                                          ============   ============  ============
</TABLE>




                                      F-9
<PAGE>   46

      Goodwill has been recorded as an intangible asset and is presented net of
      accumulated amortization of $2,573,438 and $568,985 at December 31, 1998
      and 1997, respectively. During 1998, goodwill was reduced by an asset
      impairment charge of $2,821,440 (see Note 10). The Company paid
      $1,466,840, $81,505 and $184,500 to a principal stockholder (the
      "Stockholder") for advisory services for the years ended December 31, 1998
      and 1997 and the period from May 10, 1996 (date of inception) to December
      31, 1996, respectively.

      PRO FORMA CONDENSED STATEMENTS OF OPERATIONS DATA - Pro forma statements
      of operations data for the years ended December 31, 1998 and 1997 reflect
      adjustments to the historical statements of operations data to give effect
      to (I) the April 1998 issuance of $100 million of senior subordinated
      debt, (ii) the April 1998 purchase of the assets of StarTime Cinema, Inc.
      for approximately $22.3 million, (iii) the April 1998 purchase of the
      assets of The Landmark Theatre Group for approximately $62.5 million, (iv)
      the March 1998 purchase of three theaters from AMC Entertainment, Inc. for
      approximately $1.6 million, (v) the March 1998 issuance of 99,595 shares
      of Series A Buyout Fund II, L.P. for $10.0 million and the April 1998
      issuance of 29,878 shares of Series A Preferred Stock and 12,151 shares of
      common stock to DLJ Fund Investment Partners II, L.P. for $3.0 million,
      and (vi) the repayment of certain borrowings of approximately $2.6
      million, in each case as if such events had occurred at the beginning of
      each respective period. Unaudited pro forma data follows (in thousands):

<TABLE>
<CAPTION>
                                                             YEARS ENDED
                                                             DECEMBER 31,
                                                       ------------------------
                                                          1998          1997
                                                       ----------    ----------
<S>                                                    <C>           <C>       
Revenues                                               $  101,690    $  106,288

Net loss                                               $  (18,054)   $   (9,195)
</TABLE>

      The unaudited pro forma results of operations are not necessarily
      indicative of what the actual results of operations of the Company would
      have been had the acquisition occurred at the beginning of the periods
      presented, nor do they purport to be indicative of the future results of
      operations of the Company.

3.    THEATER PROPERTIES AND EQUIPMENT

      Property and equipment at December 31, 1998 and 1997 consist of the
      following:

<TABLE>
<CAPTION>
                                                         1998           1997
<S>                                                  <C>            <C>         
Land                                                 $  1,810,062   $     50,000
Buildings                                              10,689,846      1,000,000
Leasehold interests and improvements                   31,770,730      2,103,055
Theater furniture and equipment                        26,295,904      6,138,930
Theaters under construction                               897,181         77,575
                                                     ------------   ------------

           Total                                       71,463,723      9,369,560

Less accumulated depreciation and amortization         (4,550,682)      (681,136)
                                                     ------------   ------------

Theater properties and equipment - net               $ 66,913,041   $  8,688,424
                                                     ============   ============
</TABLE>

      Depreciation and amortization expense related to theater properties and
      equipment for the years ended December 31, 1998 and 1997 and for the
      period from May 10, 1996 (date of inception) to December 31, 




                                      F-10
<PAGE>   47

      1996 (primarily incurred in November and December 1996) was $3,871,060,
      $642,259 and $39,179, respectively. During 1998, theater properties and
      equipment was reduced by an asset impairment charge of $1,618,246 (see
      Note 10).

      The assets acquired through capitalized theatre leases at December 31,
      1998, amount to $706,381 and the assets acquired through capitalized
      equipment leases amount to $4,206,595 for this same period. Accumulated
      amortization of assets under capitalized leases at December 31, 1998, and
      related depreciation expense for the year ended December 31, 1998 was
      $212,978.

4.    OTHER ASSETS

      Other assets at December 31, 1998 and 1997 consist of the following:

<TABLE>
<CAPTION>
                                                       1998            1997
<S>                                                <C>             <C>         
Noncompete agreements                              $  2,026,400    $  1,250,000
Debt issue costs                                      4,555,659         772,949
Organization costs                                       52,431          52,431
                                                   ------------    ------------

Total                                                 6,634,490       2,075,380

Less accumulated amortization                        (1,274,262)       (383,982)
                                                   ------------    ------------

Net                                                   5,360,228       1,691,398

Employee notes receivable                               136,681         186,911
Equipment, lease and other deposits                   5,348,949         648,253
                                                   ------------    ------------

Total                                              $ 10,845,858    $  2,526,562
                                                   ============    ============
</TABLE>

5.    DEBT

      The following is a summary of debt at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                          1998          1997
                                                     ------------  ------------
<S>                                                  <C>           <C>         
10 1/2% Senior subordinated notes                    $100,000,000
Revolving loan facility                                            $  6,500,000
Other                                                     220,000        97,009
                                                     ------------  ------------

Total long-term debt                                  100,220,000     6,597,009

Less current portion                                      110,000        (6,448)
                                                     ------------  ------------

Long-term debt, less current portion                 $100,110,000  $  6,590,561
                                                     ============  ============
</TABLE>

      The senior subordinated notes bear interest at 10 1/2% and are due in
      2005. The notes are redeemable, in whole or in part, at the option of the
      Company at a redemption price of 107.875% in 2001, 105.250% in 2002,
      102.625% in 2003 and 100% in 2004 and thereafter plus any accrued but
      unpaid interest. In addition, on or before April 15, 2001, the Company
      may, at its option and subject to certain requirements, 




                                      F-11
<PAGE>   48

      use an amount equal to the net cash proceeds from one or more public
      equity offerings, as defined, to redeem up to an aggregate of 35% of the
      principal amount of the notes originally issued at a redemption price of
      110.5% plus any accrued but unpaid interest. Upon a change in control of
      the Company, as defined in the indenture, the Company will be required to
      make an offer to repurchase all or any part of each holder's notes at a
      price equal to 101% of the principal amount thereof plus interest. The
      notes also include restrictive covenants relative to the incurrence of
      additional indebtedness, the payment of dividends and other matters.

      CREDIT AGREEMENTS - The Company has obtained a commitment for a $40.0
      million revolving line of credit from DLJ Capital Funding, Inc. which
      expires on March 31, 1999. Until such time that the Company enters into
      the revolving credit facility, the Company will not be able to borrow
      under any credit facility.

      Through 1998, the Company had a credit agreement with a group of lenders,
      which included a reducing, revolving loan facility and a letter of credit
      facility. Under the reducing, revolving loan facility, the initial
      commitment was $25 million, subject to certain restrictions. Borrowings
      under the credit agreement were repaid during 1998 with proceeds from the
      senior subordinated notes.

      At December 31, 1998, the scheduled maturities of debt were as follows:

<TABLE>
<S>                                                                 <C>         
1999                                                                $    110,000
2000                                                                     110,000
Thereafter                                                           100,000,000
                                                                    ------------

                                                                    $100,220,000
                                                                    ============
</TABLE>

6.    CAPITAL STOCK

      CUMULATIVE PREFERRED STOCK - The Company has 500,000 authorized shares of
      $.01 par value preferred stock at December 31, 1998, with 400,000 shares
      designated as voting Series A Preferred Stock ("Series A"). Each
      outstanding Series A share bears a $6.00 cumulative annual dividend which
      is payable if earned and declared, if the Series A preferred stock is
      redeemed or if the Company is liquidated. The Company may redeem all
      Series A shares at any time for $100 per share plus dividends in arrears.
      As of December 31, 1998 and 1997, aggregate Series A preferred stock
      dividends of $2,776,235 and $1,213,131, respectively, are in arrears.

      During 1998, the Company issued Series A preferred stock and common stock
      for approximately $17.5 million and $3.0 million to the Stockholder and
      DLJ Fund Investment Partners II, L.P., respectively.

      STOCKHOLDERS' AGREEMENT - The Company and its stockholders have entered
      into a stockholders' agreement which provides certain restrictions and
      rights related to the transfer, sale or purchase of capital shares.




                                      F-12
<PAGE>   49



7.    LEASES AND OTHER COMMITMENTS

      LEASES - The Company has noncancelable operating and capital leases
      primarily involving theater facilities and equipment with varying terms.
      In addition to the minimum annual lease payments, most of these leases
      provide for contingent rentals based on operating results and require the
      payment of taxes, insurance and other costs applicable to the property.
      Generally, these leases include renewal options for various periods at
      stipulated rates.

      Rent expense under operating leases for the years ended December 31, 1998
      and 1997 and for the period from May 10, 1996 (date of inception) to
      December 31, 1996 (primarily incurred in November and December 1996)
      totaled $13,803,689, $3,177,013 and $234,293, respectively. The terms of
      an operating lease obligate the Company to incur costs to bring one of its
      theatres into compliance with seismic requirements. The Company estimates
      that related costs will approximate $1,250,000.

      Future minimum payments under noncancelable operating leases with initial
      or remaining terms in excess of one year at December 31, 1998, are due as
      follows:

<TABLE>
<S>                                                               <C>          
                         1999                                     $  18,092,804
                         2000                                        16,916,439
                         2001                                        16,358,107
                         2002                                        14,610,022
                         2003                                        13,551,307
                         Thereafter                                  82,334,526
                                                                  -------------

Total                                                             $ 161,863,205
                                                                  =============
</TABLE>


      Future minimum lease payments under capital leases together with the
      present value of minimum lease payments consist of the following:

<TABLE>
<S>                                                               <C>          
                         1999                                     $     798,269
                         2000                                           842,837
                         2001                                           537,946
                         2002                                           537,946
                         2003                                           537,946
                         Thereafter                                   7,685,931
                                                                  -------------
                                                                     10,940,875

Less amount representing interest                                    (6,220,292)
                                                                  -------------
Present value of future minimum lease payments                        4,720,583
Less current portion                                                   (306,284)
                                                                  -------------

Total                                                             $   4,414,299
                                                                  =============
</TABLE>

      The Company is completing theater improvements related to lease agreements
      requiring additional future minimum lease payments estimated to be $32.8
      million over 20 years.

      LETTERS OF CREDIT AND COLLATERAL - At December 31, 1998 and 1997, the
      Company has outstanding letters of credit of $3,450,000 and $15,000,
      respectively, in connection with future theater construction and
      improvement.





                                      F-13
<PAGE>   50

8.    CONTINGENCIES

      The Company, in the normal course of business, is party to various legal
      actions. Management believes that the potential exposure, if any, from
      such matters would not have a material adverse effect on the financial
      condition, results of operations or cash flows of the Company.

9.    SEGMENTS

      The Company identifies its segments based on type of films exhibited and
      management responsibility. Segment profit (loss) is measured as operating
      profit (loss), which is defined as profit (loss) before other income
      (expense). During the year ended December 31, 1997 and the period from May
      10, 1996 (date of inception to December 31, 1996, the Company had no
      operations in the Specialty Film segment. Information on segments and a
      reconciliation to net loss for the year ended December 31, 1998 are as
      follows (in 000's):

<TABLE>
<CAPTION>
                                                                       SILVER       
                                                       LANDMARK        CINEMAS      
                                                      (SPECIALTY      (SECOND AND    
                                                         FILM)         FIRST-RUN)     CORPORATE       CONSOLIDATED

<S>                                                    <C>             <C>                              <C>     
Revenues                                               $ 39,804        $ 37,412                         $ 77,216
Depreciation and amortization                             3,271           3,236                            6,507
Asset impairment charges                                     70           4,510                            4,580

Operating income (loss)                                   1,178          (9,099)                          (7,921)
Interest expense and debt issue costs                                                  $(9,409)           (9,409)
Interest income and other expense                                                          544               544
                                                                                                       ---------

Net loss                                                                                               $ (16,786)
                                                                                                       ==========

Total assets                                           $ 79,865        $ 48,308        $ 4,219         $ 132,392
</TABLE>


      Corporate assets consist primarily of debt issue costs. Additions to the
      Specialty Film and Discount segments' long-lived assets were $78,844,910
      and $30,800,476, respectively, in 1998.

10.   ASSET IMPAIRMENT CHARGES

      During 1998, the Company impaired assets at 24 locations based on its
      continuing evaluation of recoverability of long-lived theater assets at 20
      locations and its intent to close and dispose of 4 locations. Impairment
      costs of $4,580,000 reduced goodwill and theater properties and equipment.



                                      F-14
<PAGE>   51

11.   INCOME TAXES

      Deferred tax liabilities (assets) at December 31, 1998 and 1997 consist of
the following:

<TABLE>
<CAPTION>
                                                            1998          1997
<S>                                                     <C>           <C>         
Deferred tax assets:
   Net operating loss carryforwards                     $(6,000,000)  $  (700,000)
   Book accruals and reserves in excess of
      cumulative tax deductions                            (100,000)      (50,000)
                                                        -----------   -----------

Total                                                    (6,100,000)     (750,000)

Deferred tax liabilities -
   Tax depreciation and amortization in excess of book    2,500,000       150,000
Valuation allowance                                       3,600,000       600,000
                                                        -----------   -----------

                                                        $      --     $      --- 
                                                        ===========   ===========
</TABLE>

      The Company has provided a full valuation allowance for net deferred tax
      assets due to the lack of an earnings history. Gross deferred tax assets
      at December 31, 1998 and 1997, include net operating loss carryforwards of
      approximately $15,000,000 and $1,700,000, respectively, for income tax
      purposes. These net operating loss carryforwards begin to expire in 2011
      and may be limited in use in the event of significant changes in the
      Company's ownership.

12.   EMPLOYEE BENEFIT PLAN

      During 1998, the Company implemented a 401(k) plan covering substantially
      all employees meeting certain eligibility requirements. Participants may
      make contributions to the plan of up to 15% of their gross salary and are
      fully vested. Employer contributions to the plan, which are made at the
      discretion of the Company, are made up to 50% of participant contributions
      to a maximum of 6% of compensation. The 401(k) contributions expense
      charged to operations for the year ended December 31, 1998, was $90,202.

13.   FINANCIAL INSTRUMENTS

      The following estimated fair value information for financial instruments
      has been determined by the Company using available market information and
      appropriate valuation methodologies. However, considerable judgment is
      necessarily required to interpret market data to develop estimates of fair
      value. Accordingly, the estimates presented herein are not necessarily
      indicative of the amounts the Company could realize in a current market
      exchange. The use of different market assumptions and/or estimation
      methodologies may have a material effect on the estimated fair value
      amounts.

      The carrying amount of cash and cash equivalents, accounts receivable,
      accounts payable, accrued liabilities and certain notes payable and
      long-term obligations approximates fair value. The fair value of
      $83,000,000 at December 31, 1998 for the 10 1/2% Senior Subordinated 
      Notes is based on quoted market prices. The fair value estimates
      presented herein are based on pertinent information available to
      management as of December 31, 1998 and 1997. Although management is not
      aware of any factors that would significantly affect the estimated fair
      value amounts, such amounts have not been comprehensively revalued for
      purposes of these financial statements since the date presented, and
      therefore, current estimates of fair value may differ significantly from
      the amounts presented herein.





                                      F-15
<PAGE>   52
                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
     EXHIBIT NO.            DESCRIPTION
     <S>               <C>
        27             Financial Data Schedule
</TABLE>