<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                                   FORM 10-K
 
(Mark One)
 
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934
 
  For the fiscal year ended December 31, 1998
 
                                      OR
 
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934
 
  For the transition period from     to
 
        Commission File Numbers 333-36736, 333-36736-01 & 333-36736-02
 
                            Hollywood Theaters, Inc
                       Hollywood Theater Holdings, Inc.
                           Crown Theatre Corporation
          (Exact Name of Registrants as Specified in their Charters)
 
               Delaware                                75-2598844
               Delaware                                75-2605571
               Missouri                                43-1530337
    (State or Other Jurisdiction of        (I.R.S. Employer Identification No.)
    Incorporation or Organization)
 
 
                                                          75219
  2911 Turtle Creek Blvd., Dallas,                      (Zip Code)
                Texas
   (Address of Principal Executive
              Offices)
 
      Registrant's telephone number, including area code: (214) 528-9500
 
       Securities registered pursuant to Section 12(b) of the Act: None
 
       Securities registered pursuant to Section 12(g) of the Act: None
 
  Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
 
  There is no established public trading market for any of the registrants'
common stock. As of March 30, 1999, there were 120,072 shares of common stock
of Hollywood Theater Holdings, Inc. outstanding; 9,250 shares of common stock
of Hollywood Theaters, Inc. outstanding, all of which are owned by Hollywood
Theater Holdings, Inc.; and 500 shares of common stock of Crown Theatre
Corporation outstanding, all of which are owned by Hollywood Theaters, Inc.
 
                   Documents Incorporated by Reference: None
 
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<PAGE>
 
                            HOLLYWOOD THEATERS, INC.
 
                        HOLLYWOOD THEATER HOLDINGS, INC.
 
                           CROWN THEATRE CORPORATION
 
                           Annual Report on Form 10-K
                  For the fiscal year ended December 31, 1998
 
                               Table of Contents
 
                                     PART I
 
<TABLE>
 <C>       <S>                                                              <C>
 Item 1--  Business                                                           3
 
 Item 2--  Properties                                                        16
 
 Item 3--  Legal Proceedings                                                 16
 
 Item 4--  Submission of Matters to a Vote of Security Holders               17
 
                                    PART II
 
           Market for Registrants' Common Equity and Related Stockholder
 Item 5--  Matters                                                           19
 
 Item 6--  Selected Financial Data                                           20
 
 Item 7--  Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                         21
 
 Item 7A-- Quantitative and Qualitative Disclosures About Market Risk        29
 
 Item 8--  Financial Statements and Supplementary Data                       29
 
 Item 9--  Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure                                          30
 
                                   PART III
 
 Item 10-- Directors and Executive Officers of the Registrants               30
 
 Item 11-- Executive Compensation                                            32
 
 Item 12-- Security Ownership of Certain Beneficial Owners and Management    39
 
 Item 13-- Certain Relationships and Related Transactions                    42
 
                                    PART IV
 
           Exhibits, Financial Statement Schedules, and Reports on Form
 Item 14-- 8-K                                                               45
</TABLE>
 
                                       2
<PAGE>
 
                           HOLLYWOOD THEATERS, INC.
                       HOLLYWOOD THEATER HOLDINGS, INC.
                           CROWN THEATRE CORPORATION
 
                                    PART I
 
Item 1. Business
 
  Hollywood Theaters, Inc. ("Hollywood" or the "Company") operates theaters in
small and mid-sized markets in the Southwestern and Midwestern regions of the
United States. The Company's strategy is to provide a superior entertainment
experience to its customers through the development and operation of theaters
with stadium-style seating, state-of-the-art digital sound systems and modern,
attractive lobby and concession areas. As of December 31, 1998, the Company
operated 72 theaters with a total of 484 screens, located principally in
Texas, Oklahoma, Kansas and Missouri.
 
  Founded in June 1995, the Company has grown rapidly by: (i) acquiring
theaters; (ii) building new multiplex theaters featuring "black box"
auditoriums with stadium-style seating in targeted markets; and (iii) adding
stadium-style auditoriums and state-of-the-art sight and sound systems to its
existing theaters.
 
  The Company is a wholly-owned subsidiary of Hollywood Theater Holdings, Inc.
("Holdings"). The principal stockholders of Holdings include The Beacon Group
III--Focus Value Fund, L.P. ("BGFVF"), Stratford Capital Partners, L.P. and
Stratford Equity Partners, L.P. (collectively, "Stratford") and several
entities associated with the Hoak Communications Funds (the "Hoak Entities").
See "Item 12. Security Ownership of Certain Beneficial Owners and Management--
Principal Stockholders." Crown Theatre Corporation ("Crown"), the Company's
sole subsidiary, currently owns and operates three motion picture theaters and
has been wholly-owned by either Holdings or the Company since Crown was
acquired on November 1, 1996. With respect to the business of Hollywood and
unless the context otherwise requires, references in this document to the
"Company" include Hollywood Theaters, Inc. and Crown Theatre Corporation.
 
  The Company is a Delaware corporation with its principal executive offices
located at 2911 Turtle Creek Boulevard, Suite 1150, Dallas, Texas 75219 and
its telephone number at that location is (214) 528-9500.
 
 Industry Overview
 
  Based on industry sources, the Company believes that the North American
motion picture exhibition industry is comprised of approximately 525
exhibitors, approximately 285 of which operate four or more total screens. At
December 31, 1998, the ten largest exhibitors operated approximately 53% of
the total screens in operation, with no one exhibitor operating more than
approximately 11% of the total screens. From 1986 through 1998, the net number
of screens in operation in the United States increased from approximately
20,000 to approximately 34,200.
 
  One of the most important industry trends in recent years is the development
of multiplex theaters with stadium-style seating and digital sound. These
theaters set new standards for moviegoers, who have demonstrated a preference
for the more modern facilities, wider variety of films, better customer
service and more comfortable seating typical of these newer multiplexes.
 
 
                                       3
<PAGE>
 
  According to data released by the Motion Picture Association of America, the
U.S. box office sales of approximately $6.9 billion in 1998 was a record for
the industry. Overall attendance has grown modestly during the most recent
eight year period. The Company believes that the primary reason for the
variances in the year-to-year attendance is the overall audience appeal of the
films released and to a lesser extent general economic conditions. The
following table represents the results of a survey by the Motion Picture
Association of America outlining the historical trends in U.S. theater
attendance, average ticket prices and box office sales for the last eight
years.
 
<TABLE>
<CAPTION>
                                                                       U.S. Box
                                                              Average   Office
                                                   Attendance Ticket    Sales
      Year                                         (Millions)  Price  (Billions)
      ----                                         ---------- ------- ----------
      <S>                                          <C>        <C>     <C>
      1991........................................   1,141     $4.21    $4.80
      1992........................................   1,173      4.15     4.87
      1993........................................   1,244      4.14     5.15
      1994........................................   1,292      4.18     5.40
      1995........................................   1,263      4.35     5.49
      1996........................................   1,339      4.42     5.91
      1997........................................   1,400      4.57     6.40
      1998........................................   1,486      4.70     6.95
</TABLE>
 
  The Company believes that 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. 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 movie theater industry and
the home video industry, and the significantly increased channel capacity
created by enhanced cable and satellite-based transmission systems. Moreover,
the Company believes independent producers and distributors, such as Gramercy
Pictures, New Line Cinemas, Castle Rock Entertainment and Dreamworks SKG,
should help increase motion picture production. The Company believes that an
increasing supply of quality feature films and "event" films exhibited with
advanced projection and stereo sound equipment, such as Digital Theater Sound
Systems, Dolby(R) Digital Sound and SONY Dynamic Digital Sound, and THX(R)
sound systems will enhance the movie going experience and will increase
theater attendance of exhibitors, such as the Company, with modern multiplex
theaters designed to exhibit such motion pictures.
 
 Business Strategy
 
  The Company believes that moviegoers have indicated their preferences for
the unique entertainment features, more attractive theater surroundings,
better customer services and more comfortable seating typical of stadium-style
multiplexes. Stadium-style multiplex theaters also enhance the Company's
ability to increase attendance and concession sales while taking advantage of
economies of scale by concurrently exhibiting a wider variety of films with
more show times.
 
  The Company's strategy has been to increase its revenues, cash flow and
earnings by (i) constructing new stadium-style theaters and auditoriums in
existing target markets; (ii) targeting under-served markets for new stadium-
style theater development; (iii) providing a superior entertainment experience
designed to attract larger audiences; and (iv) increasing per capita box
office and concession revenues. However, this strategy has not resulted in the
generation of cash flow and earnings sufficient to meet the Company's
liquidity needs, due in large part to significant competition experienced by
the Company in markets in which the Company operates. During 1998, the Company
sought to refine its business strategy in response to competitive and market
conditions. During this period, the Company also explored various financing
options to carry out its business plans but, as of December 31, 1998, the
Company had no firm financing commitments to complete its theater construction
and development plans. In March 1999, the Company entered into agreements to
recapitalize the Company. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition and
Liquidity--Proposed Recapitalization Transactions."
 
                                       4
<PAGE>
 
 Theater Operations
 
  As of December 31, 1998, the Company operated 72 theaters with an aggregate
of 484 screens in six states and an average of 6.7 screens per theater. The
following table profiles the Company's theaters at December 31, 1998:
 
                          Profile of Company Theaters
 
                            Stadium-Style Theaters
 
<TABLE>
<CAPTION>
                                                                       Average
                                                     Total   Total     Screens
    State                                           Screens Theaters Per Theater
    -----                                           ------- -------- -----------
   <S>                                              <C>     <C>      <C>
   Texas...........................................    63       5       12.6
   Oklahoma........................................    26       2       13.0
   Kansas..........................................    12       1       12.0
   Missouri........................................    28       2       14.0
                                                      ---     ---       ----
     Total Stadium-Style...........................   129      10       12.9
 
                              First Run Theaters
 
<CAPTION>
                                                                       Average
                                                     Total   Total     Screens
    State                                           Screens Theaters Per Theater
    -----                                           ------- -------- -----------
   <S>                                              <C>     <C>      <C>
   Texas...........................................    70      10        7.0
   Oklahoma........................................    84      13        6.5
   Kansas..........................................    52      11        4.7
   Missouri........................................    27       5        5.4
   Ohio............................................    11       1       11.0
   Idaho...........................................     4       1        4.0
                                                      ---     ---       ----
     Total First Run...............................   248      41        6.0
 
                               Discount Theaters
 
<CAPTION>
                                                                       Average
                                                     Total   Total     Screens
    State                                           Screens Theaters Per Theater
    -----                                           ------- -------- -----------
   <S>                                              <C>     <C>      <C>
   Texas...........................................    72      13        5.5
   Oklahoma........................................    12       2        6.0
   Kansas..........................................     4       1        4.0
   Missouri........................................    13       3        4.3
   Ohio............................................     4       1        4.0
   Idaho...........................................     2       1        2.0
                                                      ---     ---       ----
     Total Discount................................   107      21        5.1
</TABLE>
 
  At December 31, 1998, the Company operated 129 stadium-style screens at ten
newly built all-stadium theaters compared to 80 stadium-style screens at seven
newly built all-stadium theaters at December 31, 1997. These stadium-style
theaters contributed approximately 16% and 29% of the Company's revenues and
theater level cash flow, respectively, in 1997 and approximately 32% and 56%
of the Company's revenues and theater level cash flow, respectively, in 1998.
 
  At December 31, 1998 the Company operated 41 first run theaters with an
aggregate of 248 screens, including 15 stadium-style screens at two
traditional first run theaters compared to 53 first run theaters with an
aggregate of 288 screens, including six stadium-style screens at two
traditional first run theaters at December 31, 1997. The Company's first run
theaters contributed approximately 71% and 67% of the Company's revenues and
theater level cash flow, respectively, in 1997 and approximately 58% and 46%
of the Company's revenues and theater level cash flow, respectively, in 1998.
 
                                       5
<PAGE>
 
  At December 31, 1998, the Company operated 21 discount theaters with an
aggregate of 107 screens compared to 21 discount theaters with an aggregate of
101 screens at December 31, 1997 which exhibit second run movies and charge
lower admission prices (typically $1.00-$1.50) than its stadium and first run
theaters. The terminology "second run" is an industry term for the showing of
movies after a film has completed its initial run at a first run theater.
These movies are of the same high quality as those shown at the Company's
first run theaters but, due to the film's second run status, the Company pays
lower film rental costs. The Company's discount theaters contributed
approximately 13% and 4% of the Company's revenues and theater level cash
flow, respectively, in 1997 and approximately 10% and a negative 2% of the
Company's revenues and theater level cash flow respectively, in 1998.
 
  The Company is committed to providing customers in all of its theaters with
a premium moviegoing experience by emphasizing clean, conveniently located and
modern facilities with state-of-the-art equipment. The Company has undertaken
improvements in screens and projection systems, as well as lobby facilities
and design. The Company has incorporated wider, more comfortable seats with
armrests and cup holders in its newly constructed theaters. The Company also
invests in high quality projection and stereo sound equipment to enhance the
movie going experience. Technical sound enhancements adopted by the Company
include Digital Theater Sound Systems, Dolby(R) Digital Sound and SONY Dynamic
Digital Sound. Management estimates that a majority of films in 1999 will have
digital soundtracks available as an alternative to the standard stereo
soundtrack. At December 31, 1998, 100% and approximately 97% of the Company's
stadium-style auditoriums were equipped with stereo sound and digital sound
capabilities, respectively, and approximately 82% and 29% of the Company's
first run auditoriums were equipped with stereo sound and digital sound
capabilities, respectively.
 
  The Company's corporate office, which employed approximately 66 individuals
as of December 31, 1998, is responsible for theater development and site
selection, lease negotiation, theater design and construction, film licensing
and settlements, concession vendor negotiations and financial and accounting
activities. The Company's theater operations are divided into five geographic
divisions, each of which is headed by a district manager. The Company's
district managers are responsible for implementing Company operating policies
and supervising the managers of the individual theaters. Theater managers are
responsible for the day-to-day operations of the Company's theaters including
optimizing staffing, developing theater promotions, ordering concession
inventory, maintaining a clean and functioning facility and training theater
staff. The Company maintains an incentive compensation program for its
district managers and theater managers, which rewards managers for incremental
improvements in theater profitability. In addition, employees who directly
sell concessions are also rewarded for increased concession sales through
theater-based bonuses and contests sponsored by individual theater managers.
 
 Theater Development
 
  The Company's strategy has emphasized the development of new multiplex
theaters with stadium-style auditoriums showing first-run feature films. The
Company has designed prototype multiplex theaters, which can be adapted to
suit the size requirements of a particular location and the availability of
parking. The Company's multiplex theaters are designed to create an inviting
and patron-friendly experience for the customer. The multiplex theaters
typically contain auditoriums having from 100 to 300 seats each and feature
stadium-style seating for enhanced viewing, comfortable highback seats with
cupholder armrests, "black-box" auditorium interiors (all black auditorium
interiors to enhance viewing), maximum size screens and digital stereo
surround-sound. The exterior and common areas of these theaters are designed
with neon and tile, and common areas include multiple concession stands, video
game areas and private party rooms adjacent to the theater lobby. The Company
believes that stadium-style auditoriums with black-box interior and digital
sound will provide an entertainment experience which is superior to that
available at a conventional theater. More importantly, the Company believes
that construction and operation of high quality theaters provides significant
competitive advantages as theater patrons and film distributors have
demonstrated a preference for multiplex theaters and the premium movie going
experience they can provide.
 
                                       6
<PAGE>
 
  Multiplex theaters generally enhance the Company's operating efficiency.
Multiplex theaters enable the Company to offer a wide selection of films
attractive to a diverse group of patrons residing within the drawing area of a
particular theater complex. Because the percentage amount of film rental fees
decreases over the course of a run, varied auditorium seating capacities
within the same theater enable the Company to reduce average film rental costs
(and thereby increase operating margins) by exhibiting films for a longer
period of time through the shifting of films to smaller auditoriums to meet
changing attendance levels. In addition, operating efficiencies are realized
through the economies of having common box office, concession, projection,
lobby and restroom facilities, which enable the Company to spread certain
costs, such as payroll, advertising and rent, across a higher revenue base.
Staggered movie starting times also minimize staffing requirements, reduce
lobby congestion and contribute to more desirable parking and traffic flow
patterns.
 
  The Company continually evaluates existing and new markets for potential
theater locations. The Company generally seeks to develop theaters in film
licensing zones that are underserved as a result of changing demographic
trends or that are served by aging theater facilities. Some of the factors the
Company considers in determining whether to develop a theater in a particular
location are the market's population and average household income, proximity
to retail corridors, convenient roadway access and proximity to competing
theaters.
 
  The Company's construction program focuses on building stadium-style seating
multiplexes with an average of ten to 14 screens and adding stadium-style
seating auditoriums to select existing theaters. The Company plans its theater
construction efforts to allow for theater openings that can take advantage of
peak summer and year-end holiday film seasons.
 
  The following tables set forth the Company's completed stadium-style
auditorium developments since its inception in July 1995, including the
development of new stadium-seat multiplex theaters and the addition of
stadium-style auditoriums to existing theaters.
 
                       Stadium-Style Theater Development
 
                                 New Theaters
 
<TABLE>
<CAPTION>
                                                      Number of             Number of
   Opening Date*             Location                 Theaters               Screens
   -------------        ------------------           -----------           ------------
   <S>                  <C>                          <C>                   <C>
   November 1996        Midland, Texas                 1 theater             10 screens
   May 1997             Beaumont, Texas                1 theater             12 screens
   May 1997             Tyler, Texas                   1 theater             10 screens
   May 1997             Lawrence, Kansas               1 theater             12 screens
   December 1997        Norman, Oklahoma               1 theater             14 screens
   December 1997        Columbia, Missouri             1 theater             14 screens
   May 1998             Tulsa, Oklahoma                1 theater             12 screens
   November 1998        Odessa, Texas                  1 theater             11 screens
   December 1998        Joplin, Missouri               1 theater             14 screens
   February 1999        Mobile, Alabama                1 theater             18 screens
                                                     -----------           ------------
     Total                                           10 theaters            127 screens
     Average number of screens per
      theater                                                              12.7 screens
</TABLE>
--------
* In most instances, theaters are opened with fewer than the total number of
  screens, with the remaining screens opening within the next several weeks.
 
                                       7
<PAGE>
 
                        Stadium-Style Screen Additions
 
<TABLE>
<CAPTION>
                                            Number of Screens
                                                Added to            Total Resulting
   Opening Date*         Location           Existing Theaters           Screens
   -------------      ---------------       -----------------       ---------------
   <S>                <C>                   <C>                     <C>
   July 1996          Burleson, Texas           2 screens             10 screens
   November 1997      Heath, Ohio               5 screens             11 screens
   July 1998          Burleson, Texas           4 screens             14 screens
   May 1998           Tyler, Texas              4 screens             14 screens
                                               ----------
     Total                                     15 screens
</TABLE>
--------
* In most instances, theaters are opened with fewer than the total number of
  screens, with the remaining screens opening within the next several weeks.
 
 Theater Acquisitions
 
  Since its inception, a significant amount of the Company's growth has come
through the acquisition of existing theaters. In each of 1996 and 1997, the
Company acquired a total of 62 and 18 theaters, respectively, with an
aggregate of 270 and 120 screens, respectively. The Company did not acquire
any theaters in 1998.
 
                    Completed Acquisitions Since Inception
 
<TABLE>
<CAPTION>
                                       Number of    Number of
  Date of                               Theaters     Screens
Acquisition        Acquisition          Acquired    Acquired          Location
-----------  ------------------------ ------------ ----------- ----------------------
<S>          <C>                      <C>          <C>         <C>
July 1995    Trans Texas              11 Theaters   70 Screens Texas, Oklahoma
April
 1996        Cinemore                  6 Theaters   33 Screens Texas
August
 1996        Beaumont Cinema Ventures  2 Theaters    5 Screens Texas
November
 1996        Crown Theater            33 Theaters  138 Screens Kansas, Missouri, Ohio
November
 1996        United Artists           19 Theaters   86 Screens Texas, Oklahoma, Idaho
November
 1996        General Cinema            2 Theaters    8 Screens Texas
May 1997     United Artists            2 Theaters   12 Screens Texas
June 1997    Escape Theatres           2 Theaters   14 Screens Texas
August
 1997        General Cinema            7 Theaters   50 Screens Oklahoma
September
 1997        Waco City Lights          1 Theater    16 Screens Texas
October
 1997        Dickinson                 5 Theaters*  22 Screens Kansas, Missouri
October
 1997        Tomball                   1 Theater     6 Screens Texas
</TABLE>
--------
*Theaters were acquired in exchange for six theaters with 31 screens operated
by the Company.
 
 
                                       8
<PAGE>
 
 
 Concessions
 
  Concession sales are the Company's second largest revenue source after box
office revenues, representing approximately 35% of total revenues for 1998.
The Company has devoted considerable management effort to increasing
concession sales and margins. The Company's primary concession products are
Coca Cola(R) beverages, popcorn, hot dogs, nachos and candy.
 
  The Company has continued to introduce new concession products designed to
attract additional concession purchases. New offerings have included bottled
water, specialty coffees and frozen carbonated beverages such as Icees(R). In
addition, the Company continues to look for new selling techniques to boost
concessions sales. For instance, in an effort to increase concession revenues
per patron, the Company has increased the sizes and upgraded the containers in
which its concession products are sold. The Company now also includes sales
tax in the price of its concession products, rounding up the price to the
nearest twenty-five cents, in order to serve customers more rapidly.
 
  The Company has found that the placement, design and appearance of
concession stands are also key factors in improving sales. Accordingly, the
Company's new theaters are designed to include larger concession stands, with
each stand having multiple service stations to make it easier to serve larger
numbers of customers rapidly. The optimal placement of large concession stands
within theaters also heightens their visibility, aids in reducing the length
of concession lines and improves traffic flow around the concession stands.
The Company has redesigned the concession areas in most of its older theaters
to incorporate many of these features. In addition, the Company has installed
color video monitors in the concession areas of most of its first run theaters
so that customers may watch trailers of coming attractions while waiting in
line. The Company bases a portion of theater managers' compensation on the
level of concession sales at their theaters. In addition, employees who
directly sell concessions are also rewarded for increased concession sales
through theater-based bonuses and contests sponsored by individual theater
managers.
 
  These improvements in the Company's concession operations have led to an
increase of 10.1% in the per capita concession revenues in the Company's
theaters during 1998 as compared to 1997.
 
  In order to control the cost of concession items, the Company negotiates
prices for its concession supplies directly with concession vendors on a bulk
rate basis and distributes its concession supplies through two concession
contract distributors. The Company's largest concession vendor is The Coca
Cola Company. In April 1997, the Company signed a five-year supply contract
with The Coca Cola Company to supply soft drinks and other products to all of
its theaters.
 
 Film Licensing
 
  The Company licenses films from distributors owned by major film production
companies and from independent film distributors that typically distribute
films for smaller production companies. Film licensing is done on a film-by-
film and theater-by-theater basis. Prior to negotiating for a film license,
the Company's film buyers evaluate the prospects for upcoming films. The
criteria considered for each film include cast, director, plot, performance of
similar films, estimated film rental expense, expected Motion Picture
Association of America rating and the outlook for other upcoming films.
Successful licensing depends greatly upon the exhibitor's knowledge of trends
and historical film preferences of the residents in markets served by each
theater, as well as on the availability of commercially successful motion
pictures.
 
  For first run films, film distributors typically establish geographic zones
and offer each available film to theaters 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 three to five miles in major metropolitan and suburban areas to up to 15
miles in small towns. Each film, regardless of the distributor, is generally
licensed to only one theater in each zone. New film releases are licensed at
the discretion of the film distributors on an allocation or previewed bid
basis. In film zones where the Company has little or no
 
                                       9
<PAGE>
 
competition, the Company selects films from among those offered, permitting
the Company to exhibit many of the most commercially successful films in these
zones. In film zones where the Company faces competition, the Company usually
licenses films on an allocation basis. Under an allocation process, a
distributor will decide on a picture-by-picture, theater-by-theater basis
which exhibitor will be offered a movie and then that exhibitor will negotiate
directly with the distributor for the film. In recent years, distributors have
generally used this allocation process rather than a bidding process to
license their films. For second run films, film distributors establish
availability on a market-by-market basis after the completion of exhibition at
first run theaters, and permit each theater within a market to exhibit such
films without regard to film zones.
 
  The Company licenses films through its booking office located at the
Company's corporate headquarters in Dallas, Texas. All of the major motion
picture studios and distributors also maintain offices in Dallas. The
Company's film bookers have significant experience in the theater industry and
have developed long-standing relationships with the film distributors. Each
film booker is responsible for a geographic region and maintains relationships
with representatives of each of the major motion picture studios and
distributors having responsibility for their respective geographic regions.
The Company licenses films from all of the major distributors and is not
dependent on any one studio for motion picture product.
 
  A film license typically specifies rental fees to be paid to the distributor
based on the higher of either a gross receipts formula or a theater admissions
revenue sharing formula. Under a gross receipts formula, the distributor
receives a specified percentage of box office receipts, with the percentage
generally declining over the term of the run. First run film rental
percentages usually begin at 70% of box office receipts and gradually decline
to as low as 30% over a period of four to seven weeks. Under the theater
admissions revenue sharing formula (commonly known as the "90/10" clause), the
distributor receives a specified percentage (i.e., 90%) of the excess of box
office receipts over a negotiated reimbursement for theater expenses. Second
run film rental percentages typically begin at 35% of box office receipts and
decline to 30% after the first week. Most distributors follow an industry
practice of adjusting or renegotiating the terms of a film license after the
exhibition of the film based upon the film's success.
 
  The Company's business is dependent upon the availability of commercially
successful movies and upon its relationship with motion picture distributors.
During 1998, there were seven major distributors whose films accounted for a
substantial portion of admission revenues and top grossing films. These are
Sony Releases, Buena Vista Distribution (Disney), Universal Film Exchanges,
Warner Bros. Distribution, Twentieth Century Fox, Paramount Pictures and New
Line Cinema. There are numerous other smaller distributors and no single
distributor dominates the market. From year to year, the Company's revenues
attributable to individual distributors may vary significantly depending on
the commercial success of such distributor's films in any given year. For
1998, the percentage of the Company's admission revenues attributable to each
of its significant distributors were 12%, 21%, 10%, 12%, 15%, 21% and 5%,
respectively. The Company believes that its relationships with its film
distributors are good.
 
 Marketing
 
  In order to attract customers, the Company relies principally upon newspaper
display advertisements (substantially paid for by film distributors) and
newspaper directory film schedules (generally paid for the by the exhibitor)
to inform patrons 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 in its theaters of coming attractions and films presently playing on
the other screens which 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.
 
 Management Information Systems
 
  The Company has made a significant commitment to its management information
systems in order to enhance its ability to control costs and efficiently
manage the Company's theaters. The Company's management
 
                                      10
<PAGE>
 
information system provides corporate management by 8:00 a.m. each day with
detailed admission and concession revenue information as well as attendance
figures from the previous day. This information allows management to make
quick adjustments to movie schedules, including prolonging runs or adding
screens for movies with higher gross revenues and substituting films when
gross revenues cease to meet goals. Real-time seating and box office
information is available to box office personnel, making it possible for
theater management to avoid overselling a particular film and providing faster
and more accurate response to customer inquiries regarding showings and
available seating. The information system also tracks concession sales and
total deposits, leading to better inventory management and control.
 
 Competition
 
  The motion picture exhibition industry is highly competitive, particularly
in licensing films, attracting patrons and finding new theater sites. There
are approximately 525 participants in the North American motion picture
exhibition industry. Industry participants vary substantially in size, from
small independent operators of a single screen theater to large national
chains of multi-screen theaters affiliated with entertainment conglomerates.
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 believes that competition is often intense with respect to
licensing films and attracting patrons. In film zones where the Company has
little or no competition, the Company selects films it thinks will be most
commercially successful from those offered. In film zones where the Company
faces competition, the Company usually licenses films on an allocation basis.
The Company 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. See "--Film Licensing." Competition for patrons is
dependent upon factors such as the availability of popular films, the location
of theaters, the comfort and quality of theaters and ticket prices.
 
  Some of the Company's competitors have also sought to increase the number of
stadium-style theaters and screens in operation. Such increases may cause
certain local markets or portions thereof to have too many screens for the
population, thereby negatively affecting the earnings of non-stadium-style
theaters in the market. At the same time, there has been a consolidation among
exhibitors. At December 31, 1998, the ten largest motion picture exhibition
companies operated approximately 53% of the total screens in operation, with
no one exhibitor operating more than 11% of the total screens.
 
  The motion picture exhibition industry faces competition from a number of
motion picture exhibition delivery systems such as network, syndicated, cable
and satellite television, pay-per-view and home video systems. Despite the
proliferation of these delivery systems, theater admission revenues have
increased during each of the last four years. However, the full extent to
which these alternative motion picture delivery systems will compete with
traditional theatrical release may not be known for several years, and there
can be no assurance that these alternative motion picture exhibition delivery
systems will not in the future adversely affect attendance at the Company's
theaters. In addition, the entertainment industry has experienced rapid
technological change. As a result, the Company may face competition in the
future from new technologies that are not yet developed. Movie theaters also
face competition from other forms of entertainment competing for the public's
leisure time and disposable income.
 
 Regulation
 
  The distribution of motion pictures is 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 was not a
party, bind certain major 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. See "--Film
Licensing."
 
                                      11
<PAGE>
 
  The Company is subject to various general regulations applicable to its
operations including the Americans with Disabilities Act of 1990, as amended
(the "ADA"). The Company has evaluated the Company's existing theaters and its
specifications for new theaters and made changes to such theaters and
specifications. The Company believes its theaters and specifications for new
theaters substantially comply with the regulations of the ADA. However, the
Company is currently party to a lawsuit challenging its compliance with the
ADA at one of its theaters and there can be no assurance that the Company will
prevail in such lawsuit. See "Item 3. Legal Proceedings."
 
 Employees
 
  As of December 31, 1998, the Company had approximately 1,846 employees, of
which approximately 90% are part-time employees who are paid on an hourly
basis. None of the Company's employees are members of unions or covered by
collective bargaining agreements. The Company believes its relations with its
employees are good.
 
 Risk Factors
 
  This Annual Report on Form 10-K includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. All statements, other than statements of historical facts
included in this document, including, without limitation, certain statements
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business," may constitute forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations
include, but are not limited to, those disclosed immediately below and
elsewhere throughout this document. The Company undertakes no obligation to
publicly release any revisions to any forward-looking statements contained
herein to reflect events and circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events.
 
  Substantial Indebtedness. The Company is highly leveraged. At December 31,
1998, the Company had $164.8 million of indebtedness outstanding. This
includes $54.8 million of senior indebtedness outstanding under the Amended
and Restated Credit Agreement, dated as of August 7, 1997, among Holdings, the
Company, the banks and other financial institutions that are a party thereto
and Bank of America National Trust and Savings Association ("Bank of
America"), as Administrative Agent (as amended, the "Senior Bank Facility"),
and $110.0 million principal amount of outstanding 10 5/8% Senior Subordinated
Notes due August 1, 2007 (the "Notes"). At March 30, 1999, the Company had
$182.4 million of indebtedness outstanding, comprised of $110.0 million under
the Notes and $72.4 million of senior indebtedness (which includes a letter of
credit of $189,000) under the Senior Bank Facility which limits borrowings to
a total of $75.0 million. The degree to which the Company and Holdings are
leveraged could have important consequences to the Company and the holders of
the Notes, including: (i) a substantial portion of the Company's and Holdings'
cash flow from operations is dedicated to the payment of interest and (ii)
such leverage could limit the Company's and Holdings' ability to fund
operations and future growth. The Company's and Holdings' ability to make
scheduled payments or to refinance their indebtedness depends on their
financial and operating performance, which, in turn, is subject to prevailing
economic conditions and to financial, business, competitive and other factors,
some of which are beyond their control. The Company's and Holdings' operating
results are not sufficient for payment of the Company's and Holdings'
indebtedness.
 
  Current Event of Default; Risks Related to Potential Failure to Consummate
the Proposed Recapitalization Transactions. Since the last quarter of 1997,
the Company has experienced difficulty meeting certain of the Senior Bank
Facility financial covenants. Since November 1997 and through March 30, 1999,
the Company has obtained several waivers in respect of certain financial
covenants and amended the Senior Bank Facility on 13 occasions in connection
therewith. On January 14, 1999, the Company received a waiver of certain
financial covenants until June 30, 1999. However, in connection with obtaining
such waiver, the final maturity of the Senior Bank Facility was moved up from
August 7, 2002 to June 30, 1999.
 
                                      12
<PAGE>
 
  On February 1, 1999, the Company failed to make a scheduled interest payment
on the Notes, which constituted an event of default under the Senior Bank
Facility. On February 1, 1999, the Company and the lenders under the Senior
Bank Facility (the "Lenders") entered into a Forbearance Agreement whereby the
Lenders waived such event of default until March 1, 1999. On March 4, 1999,
the Company and the Lenders entered into a second Forbearance Agreement
whereby the Lenders again waived, subject to certain conditions, such event of
default until the earlier of (i) the consummation or expiration of the Offer
(as defined below); (ii) April 30, 1999; or (iii) the termination of such
Forbearance Agreement in accordance with its terms. Although the Lenders have
entered into the Forbearance Agreement, such Lenders are still permitted to
deliver a "blockage notice" to the Trustee (as defined below), prohibiting the
payment of any principal of, premium or interest on, or in respect of the
purchase or other acquisition of, or defeasance of, the Notes.
 
  Since the Company did not make such scheduled interest payment on the Notes
on or prior to March 3, 1999, an Event of Default occurred under the
Indenture, dated as of August 7, 1999 (the "Indenture") among the Company,
Holdings and Crown, each as guarantors, and U.S. Trust Company of Texas, N.A.,
as trustee (the "Trustee"), pursuant to which the Notes were issued. The
occurrence of such Event of Default under the Indenture allows the Trustee and
the holders of at least 25% in aggregate principal amount of Notes to declare
all the Notes to be immediately due and payable. The current Forbearance
Agreement with the Lenders provides that such agreement will terminate
immediately and automatically upon the exercise of any right or remedy under
the Indenture by any party.
 
  On March 3, 1999, the Company announced the proposed Recapitalization
Transactions (as defined and discussed below under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition and Liquidity--Proposed Recapitalization Transactions").
The Company intends to use the proceeds from the Recapitalization Transactions
to repay and retire the Senior Bank Facility and to fund the Offer and the
Consent Solicitation (as defined below). The availability of any future
borrowings under the Senior Bank Facility, under which a total of $2.6 million
was available as of March 30, 1999, is subject to BGFVF's agreement to fund
such borrowings pursuant to the Participation Agreement. If the Company is not
able to consummate the Recapitalization Transactions for any reason, including
the failure to consummate the Offer, and if the amounts due under the Senior
Bank Facility or the Notes are accelerated as described above, the Company
will not have sufficient resources, and may not have access to sufficient
resources, to satisfy timely its obligations under the Senior Bank Facility or
the Notes, including the repayment of all amounts outstanding thereunder. The
Company's lack of adequate liquidity and financing sources raise substantial
doubt about the Company's ability to continue as a going concern. Regardless
of whether the Senior Bank Facility or the Notes are accelerated, if the
Recapitalization Transactions are not consummated, there is a substantial
prospect that the Company and Holdings would be required to seek protection
under the U.S. Bankruptcy Code.
 
  Restrictive Financial Covenants. The Indenture under which the Notes were
issued contains a number of significant covenants that restrict, among other
things, the Company's ability to incur additional indebtedness, make
acquisitions or asset dispositions, create or incur liens on its assets, make
certain payments and dividends or merge or consolidate. The Company's ability
to comply with such covenants and other restrictions contained in the
Indenture may be affected by events beyond the Company's control, including
prevailing economic, financial and industry conditions. An event of default
has occurred under the Indenture as a result of the Company's failure to make
a scheduled interest payment on the Notes on or prior to March 3, 1999 and
could result in an acceleration of the indebtedness outstanding under the
Notes.
 
  In addition, the Senior Bank Facility contains significant restrictions,
including the maintenance of certain financial ratios. Since the last quarter
of 1997, the Company has experienced difficulty meeting certain of the Senior
Bank Facility financial covenants. Since November 1997 and through March 30,
1999, the Company has obtained several waivers in respect of certain financial
covenants and amended the Senior Bank Facility on 13 occasions in connection
therewith. The Company is currently operating under a waiver of certain of the
financial conditions contained in the Senior Bank Facility. The Company's
failure to make a scheduled interest payment on the Notes also constituted an
event of default under the Senior Bank Facility, as to which the Lenders
 
                                      13
<PAGE>
 
thereunder and the Company have entered into a Forbearance Agreement. The
Company cannot represent that it will be able to comply with the covenants and
restrictions under the Indenture or the Senior Bank Facility in the future.
Furthermore, the Company cannot represent that it will have sufficient
resources or have access to sufficient resources to satisfy its obligations
under the Notes or to satisfy timely the Senior Bank Facility if such
indebtedness were to be accelerated. For additional information regarding the
Company's financing arrangements and liquidity concerns, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition and Liquidity."
 
  Substantial Capital Expenditures. During 1998, the Company opened three
newly built stadium theaters with 37 screens. At December 31, 1998, the
Company had one stadium theater with 18 screens under construction, which
opened in February, 1999. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company's capital
expenditures in connection with stadium theater development in 1998 was
approximately $67.2 million. The Company funded these capital expenditures
through cash flow from operations and borrowings under the Senior Bank
Facility. Any future development and future acquisitions may require financing
in addition to cash generated from operations and future borrowings under the
Senior Bank Facility. There can be no assurance that such additional financing
will be available to the Company on acceptable terms or at all.
 
  Dependence Upon Motion Picture Production and Performance; Relationship with
Film Distributors. The Company's business is dependent upon a number of
factors, among the most important of which are the availability of suitable
motion pictures for exhibition in its theaters, the performance of such films
in the Company's markets and the terms upon which the films are licensed. Poor
performance of films or a disruption or reduction in the production of motion
pictures by the major studios and/or independent producers could have a
material adverse effect on the Company's business and its results of
operations. Since the major film distributors have historically released those
films which they anticipate will be the most successful during the summer and
year-end holiday seasons, poor performance of such films or a disruption or
reduction in the number of films released during such periods could adversely
affect the Company's results for a particular quarter. Moreover, to the extent
that certain "event" films are distributed more widely than in the past, the
Company's margins may be hurt as a result of the higher film licensing fees
payable during the early period of a film's run. In addition, the Company's
business depends to a significant degree on maintaining good relations with
the major film distributors who are responsible for allocating films to the
Company's theaters. If the Company's relationship with one or more of the
major film distributors were to deteriorate for any reason, the Company could
find it more difficult to schedule the most commercially successful films in
its theaters, thereby adversely affecting the Company's results of operations.
See "Item 1. Business--Film Licensing."
 
  Significance of Price Terms. Price terms of film licenses also affect the
Company's results. Recently, more distributors have been licensing films under
firm term fee arrangements, under which the final terms are negotiated at the
time of licensing, instead of an a settlement basis, under which the terms are
adjusted subsequent to the exhibition of a motion picture. Firm term
arrangements can result in the Company retaining a lower percentage of
admissions, particularly when a film plays off more quickly than expected at
the time of the arrangement were negotiated.
 
  Competition. The motion picture exhibition industry is highly competitive.
The Company competes against a number of 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. If the Company's competitors develop or operate stadium-style
theaters in the Company's markets, the Company's results of operations could
materially and adversely be affected.
 
  The Company believes that competition is often intense with respect to
licensing motion pictures and attracting patrons. The Company 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. Competition for
patrons is dependent upon factors such as the availability of popular films,
the location of theaters, the comfort and quality of theaters and ticket
prices.
 
                                      14
<PAGE>
 
  The motion picture exhibition industry faces competition from a number of
motion picture exhibition delivery systems such as network, syndicated, cable
and satellite television, pay-per-view and home video systems. The full extent
to which these alternative motion picture delivery systems will compete with
traditional theatrical releases may not be known for several years, and there
can be no assurance that these alternative motion picture exhibition delivery
systems will not in the future adversely affect attendance at the Company's
theaters. In addition, the entertainment industry has experienced rapid
technological change. As a result, the Company may face competition in the
future from new technologies that are not yet developed. Movie theaters also
face competition from other forms of entertainment competing for the public's
leisure time and disposable income. See "Item 1. Business--Competition."
 
  Risks Related to Goodwill. Goodwill is the excess of cost over the fair
value of the net assets of businesses acquired. During 1998, the Company
recorded a $31.2 million non-cash charge on the impairment of goodwill. The
remaining goodwill at December 31, 1998 was approximately $16.2 million, or
approximately 8.8% of the Company's total assets of $184.8 million. The
Company cannot assure that it will realize the value of such remaining
goodwill. This goodwill is being amortized on a straight-line basis over 15
years. The Company evaluates on a regular basis whether events and
circumstances have occurred that indicate all or a portion of such goodwill
may no longer be recoverable, in which case an additional charge to earnings
would become necessary.
 
  Principal Stockholder. Holdings' principal stockholder, BGFVF, currently
beneficially owns approximately 65.3% of the shares of common stock, par value
$.01 per share, of Holdings (the "Holdings Common Stock"), on a fully-diluted
basis. As a result, BGFVF is able to vote more than a majority of shares on
matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. Such ownership
concentration may have the effect of delaying or preventing a change in
control of Holdings and the Company. In addition, any additional borrowings by
the Company under the Senior Bank Facility are subject to BGFVF's agreement,
in each case, to fund such borrowings pursuant to a participation arrangement
with the Lenders. If BGFVF determines not to fund such borrowings, the Company
may be unable to obtain cash necessary to fund its operations and other
obligations. See "Item 12. Security Ownership of Certain Beneficial Owners and
Management" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Liquidity--
Liquidity."
 
  Limited Operating History; Net Losses. The Company was organized in June
1995 and, accordingly, has a limited operating history. In addition, the
Company has experienced net losses since its inception. Net losses for the
period July 11, 1995 through December 31, 1995 and the fiscal years ended
December 31, 1996, 1997 and 1998 were approximately $0.9 million, $2.8
million, $7.9 million and $71.2 million, respectively. The Company cannot
assure that its future operations will generate operating income, net income
or sufficient cash flow to pay its obligations. See "Item 6. Selected
Financial Information" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
  No Dividends. Neither Holdings, Hollywood or Crown has ever declared or paid
any cash dividends on its common stock. The payment of cash dividends in the
future will depend on the Company's earnings, financial condition, capital
needs and other factors deemed pertinent by the Company's board of directors,
including the limitations, if any, on the payment of dividends under state law
and then-existing credit agreements. It is the present policy of the Company's
board of directors to retain earnings, if any, to finance the operations of
the Company's business. In addition, the Company is currently restricted by
its Senior Bank Facility and by the Notes as to the amount of cash dividends
it can declare and pay on its common stock.
 
  Seasonality. The Company's revenues have been seasonal, coinciding with the
timing of releases of motion pictures by the major distributors. Generally,
the most successful motion pictures have been released during the summer,
extending from Memorial Day to Labor Day, and the holiday season, extending
from
 
                                      15
<PAGE>
 
Thanksgiving through year-end. The unexpected emergence of a hit film during
other periods can alter this traditional trend. The timing of such film
releases can have a significant effect on the Company's results of operations
and the results of one quarter are not necessarily indicative of results for
the next quarter or for the same period in the following year. The timing of
the development, acquisition or closing of theaters may also affect the
Company's quarterly results.
 
  Geographic Concentration of Business; Changes in Economy. Approximately 63%
and 35% of the Company's theaters are located in the southwestern (Texas and
Oklahoma) and midwestern (Kansas, Missouri and Ohio) United States,
respectively. The current geographic concentration of the Company's operations
increases the potential impact on the Company's results of operations of any
regional economic downturn or catastrophic event. The Company's prospects
could be adversely affected by unfavorable general economic conditions,
including any downturns in the national, Midwest or Southwest economies, any
local economies therein, or changes in demographic mix, employment levels,
population density, weather, real estate market conditions or other factors
unique to any of these regions. Such downturns or changes could have a greater
effect on the Company than on its more geographically diverse competitors.
 
  Environmental Regulation. On account of its ownership and operation of
theaters, the Company is subject to environmental laws and regulations,
particularly laws governing the cleanup of hazardous materials and the
management of properties. While the Company is not currently involved in any
environmental matters that could have a material adverse effect on its
financial condition or results of operations, in the future, the Company might
be required to participate in the cleanup of a property that it owns or leases
or at which it is alleged to have disposed of hazardous material. In certain
circumstances, the Company might be solely responsible for any such liability
under environmental laws and therefore, any such claims could be material.
 
Item 2. Properties
 
  Of the 72 theaters operated by the Company at December 31, 1998, nine
theaters (94 screens) were owned and 63 theaters (390 screens) were leased.
The Company's leases typically have remaining terms from four to 20 years,
with options to extend the lease for up to ten additional years. The leases
typically require escalating minimum annual rent payments during the term of
the lease which are negotiated at the signing of the lease. During the next
five years approximately 33 theater leases (representing 162 screens) will
expire, representing approximately 46% of all the Company's theaters (34% of
all screens). Of those coming due within the next five years, leases at 19
theaters (representing 100 screens) will be subject to renewal options. In
addition, the Company has entered into a ground lease for another development
site.
 
  The Company leases office space in Dallas, Texas for its corporate
headquarters.
 
Item 3. 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 and results of operations.
 
  The ADA and certain state statutes, among other things, require that places
of public accommodation, including theaters (both existing and newly
constructed), be accessible to and that assistive listening devices be
available for use by certain patrons with disabilities. With respect to access
to theaters, certain interpretations of the ADA may generally require that
certain modifications be made to existing theaters to make such theaters
accessible to certain theater patrons and employees who are disabled. The ADA
requires that theaters be constructed in such a manner that persons with
disabilities have full use of the theater and its facilities and reasonable
access to work stations. The ADA provides for private rights of action and for
reimbursement of plaintiffs' attorneys' fees and expenses under certain
circumstances.
 
  On June 24, 1998, in an action in the United States District Court, Eastern
District of Texas, Beaumont Division, Civil Action No. 1:98-CV-1975, Todd
Freeland, for himself and those similarly situated, v. Hollywood Theaters,
Inc., a private plaintiff is alleging that the Company has violated the ADA
and Chapter 12 of the Texas
 
                                      16
<PAGE>
 
Human Resources Code (a state statute similar to the ADA) for not providing
comparable seating for wheelchair patrons at one of the Company's multiplex
theaters located in Beaumont, Texas. The suit seeks an unspecified amount of
actual and statutory damages in an amount of $1,000 for each violation, a
declaratory judgment and an injunction requiring the Company to modify the
wheelchair seating arrangements at the theater to provide views comparable to
those afforded to the general public. The Company has filed an answer denying
allegations in the Freeland suit. Although Hollywood Theaters believes that
the wheelchair seating provided in the Beaumont theater complies with
applicable ADA standards, the proper interpretation of those standards as they
relate to theaters with stadium-style seating is the subject of several
ongoing lawsuits within the industry and remains to be clearly established.
Accordingly, the Company may be required to modify its handicapped seating
arrangements in the Beaumont facility. There can be no assurance that any such
modifications will not materially adversely affect the Company's financial
condition, liquidity or results of operations, particularly if such
modifications are required to be made at other of the Company's theaters.
 
Item 4. Submission of Matters to a Vote of Security Holders
 
  On August 21, 1998, the stockholders of Holdings owning (i) an aggregate of
90,990 shares of the total 120,072 shares of Holdings Common Stock; (ii) an
aggregate of 171,622 shares of the total 177,995 shares of outstanding Series
B Convertible Preferred Stock, par value $.01 per share, of Holdings (the
"Holdings Series B Preferred Stock"); (iii) all of the 84,137 outstanding
shares of Series C Convertible Preferred Stock, par value $.01 per share, of
Holdings (the "Holdings Series C Preferred Stock"); and (iv) all of the 61,826
outstanding shares of Series D Convertible Preferred Stock, par value $.01 per
share, of Holdings (the "Holdings Series D Preferred Stock," and together with
the Holdings Series B Preferred Stock and the Holdings Series C Preferred
Stock, the "Holdings Preferred Stock") acted by written consent (the "August
Stockholders Consent") with respect to the adoption of resolutions regarding
the following: (a) the approval of the issuance of a new series of preferred
stock of Holdings; (b) the issuance of shares of such series, if ever, to
BGFVF pursuant to a Contingent Reimbursement Agreement, dated as of August 28,
1998 (the "August Contingent Reimbursement Agreement"), by and between
Holdings and BGFVF; (c) the amendment of the Amended and Restated
Shareholders' and Voting Agreement, dated as of December 17, 1997, of Holdings
(the "Holdings Shareholders' Agreement"), to reflect the inclusion of shares
of such series within the terms thereof, if ever such shares were to be
issued; and (d) the waiver of any preemptive rights that any stockholder of
Holdings executing the August Stockholders Consent may have had, if ever, with
respect to the issuance of shares of such series. Holders of an aggregate of
29,082 shares of Holdings Common Stock and 6,373 shares of Holdings Series B
Preferred Stock were not solicited to execute the August Stockholders Consent,
and therefore abstained from consenting to the matters set forth therein. None
of the resolutions adopted pursuant to the August Stockholders Consent were
acted upon due to the termination of the August Contingent Reimbursement
Agreement and the terms and provisions thereof effective as of January 27,
1999. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition and Liquidity--Sources of
Funds" and "Item 13. Certain Relationships and Related Transactions."
 
  On November 9, 1998, the stockholders of Holdings owning (i) an aggregate of
90,990 shares of the total 120,072 shares outstanding of Holdings Common
Stock; (ii) an aggregate of 171,622 shares of the total 177,995 shares
outstanding of Holdings Series B Preferred Stock; (iii) all of the 84,137
outstanding shares of Holdings Series C Preferred Stock; and (iv) all of the
61,826 outstanding shares of Holdings Series D Preferred Stock acted by
written consent (the "November Stockholders Consent") with respect to the
adoption of resolutions regarding the following: (a) the approval of the
designation and issuance of a new Series E Preferred Stock, par value $.01 per
share, of Holdings (the "Holdings Series E Preferred Stock"), ranking senior
to all other outstanding series of preferred stock of Holdings; (b) the
amendment of Holdings' Restated Certificate of Incorporation to reflect the
designation of the rights and preferences of the Holdings Series E Preferred
Stock therein; (c) the issuance of shares of Holdings Series E Preferred
Stock, if ever, to BGFVF pursuant to a Contingent Reimbursement Agreement,
dated as of November 10, 1998 (the "November Contingent Reimbursement
Agreement"), by and among Holdings, Hollywood and BGFVF; (d) the amendment of
the Holdings Shareholders' Agreement to reflect the inclusion of shares of the
Holdings Preferred Stock within the
 
                                      17
<PAGE>
 
terms thereof, if ever such shares were to be issued; and (e) the waiver of
any preemptive rights that any stockholder of Holdings executing the November
Stockholders Consent may have had, if ever, with respect to the issuance of
shares of Holdings Series E Preferred Stock. Holders of an aggregate of 29,082
shares of Holdings Common Stock and 6,373 shares of Holdings Series B
Preferred Stock were not solicited to execute the August Stockholders Consent,
and therefore abstained from consenting to the matters set forth therein. None
of the resolutions adopted pursuant to the November Stockholders Consent were
acted upon due to the termination of the November Contingent Reimbursement
Agreement and the terms and provisions thereof effective as of January 27,
1999. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition and Liquidity--Sources of
Funds" and "Item 13. Certain Relationships and Related Transactions."
 
  On November 12, 1998, the Company solicited (the "November Consent
Solicitation") the consents (the "November Consents") of registered holders of
the Notes to amendments to the Indenture. The purpose of the proposed
amendments was, among other things, (i) to permit the Company to issue
additional debt in an amount not to exceed $100.0 million; (ii) to permit the
Company to incur additional debt in the future, under certain circumstances,
upon obtaining additional equity; (iii) to amend the definitions of
"Consolidated Cash Flow Coverage Ratio" and "Total Incremental Equity"; (iv)
to eliminate all of the applicable provisions of the Indenture that
subordinate the Notes in right of payment to any senior debt of the Company;
and (v) to make such other changes to certain covenants and definitions as
were consistent with the offering by the Company of a new series of senior
notes and a new equity issuance pursuant to a financing plan proposed at such
time. On November 20, 1998, the Company extended the November Consent
Solicitation, which was originally set to expire on November 20, 1998, so that
such consent solicitation would expire on November 24, 1998. On November 24,
1998, the November Consent Solicitation expired according to its terms without
the minimum amount of required November Consents being delivered in connection
therewith.
 
 
                                      18
<PAGE>
 
                                    PART II
 
Item 5. Market for the Registrants' Common Equity and Related Shareholder
Matters
 
  Each of the registrants' common stock is privately held; therefore, there is
no established public trading market for any of the registrants' common stock.
See "Item 12. Security Ownership of Certain Beneficial Owners and Management."
 
  Neither Holdings, Hollywood or Crown has ever declared or paid any cash
dividends on its common stock. The payment of cash dividends in the future
will depend on consummation of the Recapitalization Transactions, the
Company's earnings, financial condition, capital needs and other factors
deemed pertinent by the Company's board of directors, including the
limitations, if any, on the payment of dividends under state law and then-
existing credit agreements. It is the present policy of the Company's board of
directors to retain earnings, if any, to finance the operations and expansion
of the Company's business. In addition, the Company is currently restricted by
its Senior Bank Facility and by the Notes as to the amount of cash dividends
it can declare and pay on its common stock.
 
  On April 1, 1998, Holdings issued (i) 297 shares of Holdings Common Stock to
Thomas V. Stephenson, Jr. as part of Mr. Stephenson's 1997 bonus payment at
$195.00 per share: (ii) 142 shares of Holdings Common Stock to Robert E.
Painter as part of Mr. Painter's 1997 bonus payment at $195.00 per share; and
(iii) 60 shares of Holdings Common Stock to James R. Featherstone as part of
Mr. Featherstone's 1997 bonus payment at $195.00 per share. The issuance of
such shares of Holdings Common Stock was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
under Section 4(2) thereof as a transaction not involving a public offering.
 
  On April 1, 1998, Holdings issued options to purchase an aggregate of 11,368
shares of Holdings Common Stock to a total of 92 employees with an exercise
price of $195.00 per share. The issuance of such options was exempt from the
registration requirements of the Securities Act under Rule 701 thereunder.
 
                                      19
<PAGE>
 
Item 6. Selected Financial Data
 
      SUMMARY AND SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
 
  The following table sets forth Holdings' summary historical consolidated
financial information for the period from inception (July 11, 1995) through
December 31, 1995 and for the fiscal years ended December 31, 1996, 1997 and
1998. The financial statements of Holdings are identical to those of the
Company, except for differences in components of stockholders' equity
(deficit). The consolidated financial information for the period from
inception (July 11, 1995) through December 31, 1995 and for the fiscal years
ended December 31, 1996, 1997 and 1998 were derived from Holdings' audited
consolidated financial statements which have been audited by Arthur Andersen
LLP, independent public accountants. The following table also sets forth
selected financial information for the period from January 1, 1995 through
July 10, 1995 and for the fiscal year ended December 31, 1994, which was
derived from the unaudited books and records of Trans Texas Amusements, Inc.
and affiliates ("Trans Texas"), the Company's predecessor. Other Financial
Data, Operating Data and Balance Sheet Data for the fiscal year ended December
31, 1994 and the period from January 1, 1995 to July 10, 1995 have not been
presented because during such periods the theaters were owned and/or operated
by persons other than the Company. The fiscal years ended December 31, 1995,
1996, 1997 and 1998 are not directly comparable due to the shortened period
Holdings and the Company were in operation during 1995, the effects of theater
acquisitions and theater developments and the impact of the debt service
associated with the debt incurred in connection with theater acquisitions and
development. This information should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including the notes thereto,
appearing elsewhere in this document.
 
<TABLE>
<CAPTION>
                                         Period from
                           Year Ended  January 1, 1995       Years Ended December 31,
                          December 31,     through      --------------------------------------
                            1994(1)    July 10, 1995(1) 1995(2)     1996      1997      1998
                          ------------ ---------------- --------  --------  --------  --------
                                  (in thousands, except ratios and operating data)
<S>                       <C>          <C>              <C>       <C>       <C>       <C>
Income Statement Data:
Revenues................    $12,542         $6,990      $  6,334  $ 24,879  $ 79,171  $101,894
Direct theater costs....      9,936          6,075         5,296    20,798    63,076    84,691
General and
 administrative
 expenses...............      1,197            281           743     1,601     5,077     7,528
Depreciation and
 amortization...........        366            202           739     3,152    11,479    18,309
Impairment of long-lived
 assets.................        --             --            --        --        --     48,083
                            -------         ------      --------  --------  --------  --------
Operating income
 (loss).................      1,043            432          (444)     (672)     (461)  (56,717)
Interest expense, net...        103             69           463     2,121     7,485    14,475
                            -------         ------      --------  --------  --------  --------
Net income (loss).......    $   940         $  363      $   (907) $ (2,793) $ (7,946) $(71,192)
                            =======         ======      ========  ========  ========  ========
Other Financial Data:
EBITDA(3)...............                                $    444  $  2,954  $ 11,552  $ 10,158
Cash flows from
 operating activities...                                     182     1,032     5,268    10,088
Cash flows used in
 investing activities...                                 (10,669)  (69,720)  (90,115)  (66,336)
Cash flows from
 financing activities...                                  10,934    71,800    88,667    54,582
Operating Data (at
 period end):
Number of theaters
 operated...............                                      11        72        81        72
Number of screens
 operated...............                                      70       342       469       484
Average screens per
 theater................                                     6.4       4.8       5.8       6.7
</TABLE>
 
                                      20
<PAGE>
 
<TABLE>
<CAPTION>
                                                    At December 31,
                                           ----------------------------------
                                            1995    1996     1997      1998
                                           ------- ------- --------  --------
                                                    (in thousands)
<S>                                        <C>     <C>     <C>       <C>
Balance Sheet Data:
Cash and cash equivalents................. $   447 $ 3,559 $  7,379  $  5,713
Properties and equipment--net.............   3,642  43,116  104,376   143,437
Total assets..............................  12,930  92,355  184,020   184,824
Total long-term debt, including current
 maturities...............................   8,877  50,669  110,000   164,800
Convertible redeemable preferred stock....     --   28,579   59,614    65,219
Redeemable common stock...................     --    2,252    2,872     2,872
Stockholders' equity (deficit)............   1,838   4,292     (689)  (77,455)
</TABLE>
--------
(1) Represents the unaudited results of operations for the fiscal year ended
    December 31, 1994 and the period from January 1, 1995 through July 10,
    1995 for the 11 theaters purchased from TransTexas on July 11, 1995.
(2) For the period from inception (July 11, 1995) through December 31, 1995.
(3) Represents income before interest, taxes, depreciation, amortization,
    deferred rent and impairment of long-lived assets. EBITDA is a financial
    measure commonly used in the Company's industry and should not be
    construed as an alternative to operating income (as determined in
    accordance with generally accepted accounting principles ("GAAP")), an
    indicator of operating performance, an alternative to cash flows from
    operating activities (as determined in accordance with GAAP) or a measure
    of liquidity. Additionally, EBITDA may not be calculated the same by all
    companies and should not be viewed as an accurate comparative measure.
 
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
Overview
 
  The Company's revenues are generated primarily from box office receipts and
concession sales which constituted approximately 64% and 35% of 1998 revenues,
respectively. Additional revenues are generated by electronic video games
located adjacent to the lobbies of certain of the Company's theaters and by
on-screen advertisements shown prior to each feature film. The Company's
revenues are principally affected by changes in attendance and average
admission and concession revenues per patron. Attendance is primarily affected
by the commercial appeal of the films released by distributors, competition
and, to a lesser extent, by the comfort and quality of the theater and
population growth in the geographic markets the Company serves.
 
  The Company's principal costs of operations are film rentals and advertising
costs, concessions costs and theater operating expenses, such as theater lease
rentals, payroll, utilities, insurance and property taxes.
 
  Admission and concession revenues are subject to seasonal fluctuations which
affect all motion picture exhibitors. These fluctuations are the result of the
distribution practice of the major motion picture studios, which have
historically concentrated the release of the most marketable films during the
summer and year-end holiday seasons when more people have tended to go to the
movies. There are other factors, however, which may affect the Company's
revenues during any particular quarter, including the popularity of films
released during the quarter and the availability of such popular films at the
Company's theaters. As a result, depending on these factors, the Company's
revenues in the first and second quarters may not be as strong as in the third
and fourth quarters.
 
                                      21
<PAGE>
 
Results of Operations
 
  The following table sets forth a summary of operating revenues and expenses
for the years ended December 31, 1996, 1997 and 1998 (in thousands).
 
<TABLE>
<CAPTION>
                                     Year Ended December 31,
                            -------------------------------------------------
                                1996             1997              1998
                            --------------   --------------   ---------------
                               $       %        $       %        $       %
                            -------  -----   -------  -----   --------  -----
<S>                         <C>      <C>     <C>      <C>     <C>       <C>
Revenues:
  Admissions............... $15,335   61.6%  $50,616   63.9%  $ 64,726   63.5%
  Concessions..............   8,710   35.0    26,712   33.7     35,257   34.6
  Other operating
   revenues................     834    3.4     1,843    2.4      1,911    1.9
                            -------  -----   -------  -----   --------  -----
    Total revenues.........  24,879  100.0    79,171  100.0    101,894  100.0
                            -------  -----   -------  -----   --------  -----
Operating expenses:
  Film rental and
   advertising costs.......   8,388   33.7    27,576   34.8     37,665   37.0
  Cost of concessions......   1,412    5.7     4,320    5.5      6,592    6.4
  Theater operating
   expenses................  10,998   44.2    31,180   39.4     40,434   39.7
  General and
   administrative
   expenses................   1,601    6.4     5,077    6.4      7,528    7.4
  Depreciation and
   amortization............   3,152   12.7    11,479   14.5     18,309   18.0
  Impairment of long-lived
   assets..................     --     --        --     --      48,083   47.2
                            -------  -----   -------  -----   --------  -----
    Total operating
     expenses..............  25,551  102.7    79,632  100.6    158,611  155.7
                            -------  -----   -------  -----   --------  -----
Operating loss.............    (672)  (2.7)     (461)  (0.6)   (56,717) (55.7)
Interest expense, net......   2,121    8.5     7,485    9.5     14,475   14.2
                            -------  -----   -------  -----   --------  -----
Net income (loss).......... $(2,793) (11.2%) $(7,946) (10.1%) $(71,192) (69.9%)
                            =======  =====   =======  =====   ========  =====
EBITDA(1).................. $ 2,954   11.9%  $11,552   14.6%  $ 10,158   10.0%
                            =======  =====   =======  =====   ========  =====
</TABLE>
--------
(1) Represents income before interest, taxes, depreciation, amortization,
    deferred rent and impairment of long-lived assets. EBITDA is a financial
    measure commonly used in the Company's industry and should not be
    construed as an alternative to operating income (as determined in
    accordance with GAAP), an indicator of operating performance, an
    alternative to cash flows from operating activities (as determined in
    accordance with GAAP) or a measure of liquidity. Additionally, EBITDA may
    not be calculated the same by all companies and should not be viewed as an
    accurate comparative measure.
 
 Comparison of Years Ended December 31, 1998 and December 31, 1997
 
  At the end of 1998 and 1997, the Company operated 72 and 81 theaters,
respectively, with an aggregate of 484 and 469 screens, respectively.
 
  Total Revenues. Total revenues increased 28.7% or $22.7 million to $101.9
million during the year ended December 31, 1998 from $79.2 million during the
year ended December 31, 1997. This increase in revenues during the year was
principally due to the Company's construction or acquisition of ten stadium-
style theaters (with an aggregate of 133 screens) during 1997 and 1998 and the
net acquisition of 11 non-stadium-style theaters (with an aggregate of 73
screens) during 1997. Of the net $22.7 million increase in revenues during
1998, $18.9 million was attributable to new stadium-style theaters constructed
or acquired by the Company and $9.6 million was attributable to non-stadium-
style theaters acquired by the Company during 1997. These revenue increases
were partially offset by a $5.8 million revenue decline caused by increased
competition in certain markets, construction delays and non-stadium-style
theaters closed during 1998. The Company generally anticipates that the trend
of increased competition will continue.
 
  The average price of a ticket for the Company's stadium, first run and
discount theaters was $4.62, $4.38 and $1.31, respectively, for the year ended
December 31, 1998 and $4.62, $4.26 and $1.28, respectively, for the year ended
December 31, 1997. This increase was principally due to the Company raising
ticket prices and
 
                                      22
<PAGE>
 
acquiring theaters with higher average ticket prices than those previously
owned. Average concession sales per customer in the Company's theaters
increased approximately 10.1% during 1998, reflecting both an increase in
consumption and an increase in prices.
 
  Direct Theater Costs. Direct theater costs (consisting of film rental and
advertising costs, cost of concessions and theater operating expenses)
increased 34.3% or $21.6 million to $84.7 million during the year ended
December 31, 1998 from $63.1 million during the year ended December 31, 1997.
As a percentage of total revenues, direct theater costs were 83.1% in the
current year compared to 79.7% in the prior year.
 
  Film rental and advertising costs increased 36.6% or $10.1 million to $37.7
million from $27.6 million in 1997 due to higher attendance and an increase in
the percentage of admissions paid to film distributors. In general, film
rental costs for popular first run films continued to increase for the
industry as a whole. In 1998, the Company's film rental costs were $34.3
million or 53% of admission revenues. In addition, the Company increased
advertising to support its new stadium theaters.
 
  Cost of concessions increased 52.6% or $2.3 million to $6.6 million during
the year ended December 31, 1998 from $4.3 million during the year ended
December 31, 1997. This is due to higher concession revenue, an increase in
concession costs from the introduction of product combination sales, use of
more expensive containers and a non-recurring charge of approximately $0.2
million related to obsolete inventory. As a percentage of concession revenues,
cost of concessions was 18.7% in the current year compared to 16.2% in the
prior year.
 
  Theater operating expenses increased 29.7% or $9.2 million to $40.4 million
during the year ended December 31, 1998 from $31.2 million during the year
ended December 31, 1997 primarily due to higher rent, payroll and related
costs, utilities and property taxes. As a percentage of total revenues,
theater operating expenses were 39.7% in the current year compared to 39.4% in
the prior year.
 
  General and Administrative Expenses. General and administrative expenses
increased 48.3% or $2.4 million to $7.5 million from $5.1 million in 1997. As
a percentage of total revenues, general and administrative expenses was 7.4%
in the current year compared to 6.4% in the prior year. The current year
includes approximately $1.2 million of non-recurring charges related primarily
to the Company's 1998 recapitalization efforts and canceled construction
projects.
 
  Depreciation and Amortization. Depreciation and amortization expense
increased 59.5% or $6.8 million to $18.3 million for the year ended December
31, 1998 from $11.5 million for the year ended December 31, 1997. The increase
was principally due to the construction of stadium-style theaters in 1997 and
1998 and theater acquisitions made during 1997.
 
  Impairment of Long-Lived Assets. During the current year, the Company
experienced increased competition in many of its markets. As a result, the
Company recognized a non-cash impairment loss of $48.1 million on certain non-
stadium theaters. The estimated undiscounted future operating cash flows
directly related to these theaters were less than the carrying amount of its
total property and equipment and related goodwill, and as such, the loss was
measured by the amount by which the total carrying amount of the theater
exceeded its estimated fair value.
 
  Interest Expense, net. Interest expense, net increased to $14.5 million for
the year ended December 31, 1998 from $7.5 million for the year ended December
31, 1997. The increase was due to increased borrowing by the Company to
finance the construction of stadium theaters.
 
  Net Loss. The Company's net loss grew to $71.2 million for the year ended
December 31, 1998 from $7.9 million for the year ended December 31, 1997.
 
 Comparison of the Years Ended December 31, 1997 and December 31, 1996
 
  At the end of 1997 and 1996, the Company operated 81 and 72 theaters
respectively, with an aggregate of 469 and 342 screens.
 
                                      23
<PAGE>
 
  Total Revenues. Total revenues were $79.2 million for the year ended
December 31, 1997 as compared to $24.9 million for year ended December 31,
1996. This increase in revenues during the years was principally due to the
Company's acquisition of 54 theaters (with an aggregate of 232 screens) during
the fourth quarter of 1996 and the acquisition of 13 theaters (with an
aggregate of 98 screens) in 1997. In addition, the Company constructed six all
stadium-style seating theaters (with an aggregate of 64 screens), one of which
was opened in November 1996, three of which opened at the end of May 1997, and
two of which opened in November and December 1997. Of the $54.3 million
increase in revenues during 1997, $44.3 million was attributable to theaters
acquired by the Company after the third quarter 1996, and $10.0 million was
attributable to new theaters constructed by the Company and theaters
previously operated by the Company.
 
  The average price of a ticket at the Company's stadium, first run and
discount theaters was $4.62, $4.26 and $1.28, respectively, for the year ended
December 31, 1997 and $4.56, $4.12 and $1.26, respectively, for the year ended
December 31, 1996. This increase was principally due to the Company raising
ticket prices and acquiring theaters with higher average ticket prices than
those previously owned. Average concession sales per customer increased
approximately 8% during 1997, reflecting both an increase in consumption and
an increase in prices.
 
  Direct Theater Costs. Film rental and advertising costs were $27.6 million
for the year ended December 31, 1997 as compared to $8.4 million for the year
ended December 31, 1996. Cost of concessions increased to $4.3 million for the
year ended December 31, 1997 from $1.4 million for the year ended December 31,
1996. Theater operating expenses increased to $31.2 million for the year ended
December 31, 1997 from $11.0 million for the year ended December 31, 1996.
Each of these increases was principally due to the Company's acquisition and
construction of theaters during 1997 and the latter part of 1996.
 
  Direct theater costs (consisting of film rental and advertising costs, cost
of concessions and other theater operating expenses) as a percentage of total
revenues decreased to 79.7% for the year ended December 31, 1997 from 83.6%
for the year ended December 31, 1996 as a result of the decrease in discount
theaters as a percentage of the Company's total theaters and improved
operations.
 
  General and Administrative Expenses. General and administrative expenses for
the year ended December 31, 1997 increased to $5.1 million from $1.6 million
for the year ended December 31, 1996. The increase was principally due to the
Company's acquisition and construction of theaters during 1997 and the latter
part of 1996. General and administrative expenses as a percentage of total
revenues are flat at 6.4% for the years ended December 31, 1997 and 1996.
 
  Depreciation and Amortization. Depreciation and amortization expense
increased to $11.5 million ended December 31, 1997 from $3.2 million for the
year ended December 31, 1996. The increase was principally due to the
Company's acquisition and construction of theaters during 1997 and the latter
part of 1996.
 
  Interest Expense, net. Interest expense, net increased to $7.5 million for
the year ended December 31, 1997 from $2.1 million for the year ended December
31, 1996. The increase was due to increased borrowing by the Company to
finance acquisitions and the construction of theaters and an increase in the
effective interest rate on the Company's borrowings as a result of the
issuance of the Notes.
 
  Net Loss. The Company's net loss grew to $7.9 million for the year ended
December 31, 1997 from $2.8 million for the year ended December 31, 1996.
 
Financial Condition and Liquidity
 
 Liquidity
 
  The Company's revenues are collected in cash, primarily through box office
receipts and concession sales. The Company generally pays for film rentals,
inventories and other theater services 15 to 45 days following receipt of
revenues. As a result of this timing difference, the Company has generally
operated with a minimum working capital position for its ongoing theater
operations.
 
                                      24
<PAGE>
 
  Cash provided by operating activities was $10.1 million, $5.3 million and
$1.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company generated net losses of $71.2 million, $7.9 million
and $2.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively. These losses included non cash charges for depreciation and
amortization, impairment of long lived assets and deferred lease expenses of
approximately $66.9 million, $12.0 million and $3.7 million for 1998, 1997 and
1996, respectively. Net increases in current liabilities provided cash of
approximately $14.4 million, $1.2 million and $0.1 million for 1998, 1997 and
1996, respectively.
 
  Cash used in investing activities was $66.3 million, $90.1 million and $69.7
million for the years ended December 31, 1998, 1997 and 1996, respectively.
Investing activities consist of theater development and acquisition and
remodeling and expansion of existing theaters. Cash provided by financing
activities was $54.6 million, $88.7 million and $71.8 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
 
  The Company has funded its capital needs primarily through capital
contributions from Holdings, proceeds from the issuance of the Notes,
borrowings under the Senior Bank Facility and funds generated from its
operations. Since its inception in 1995, the Company has received capital
contributions from Holdings totaling $74.3 million. Since Holdings has no
operations, these capital contributions represented the proceeds of equity
issuances by Holdings.
 
  The Company has outstanding $110.0 million principal amount of Notes. The
Notes were issued in August 1997 and are governed by the terms of the
Indenture. Holdings and Crown are guarantors of the Notes.
 
  The Company's direct financing sources are limited currently to borrowings
under the Senior Bank Facility. The Company's outstanding indebtedness as of
December 31, 1998 was comprised of the $110.0 million principal amount
outstanding of Notes, the approximately $49.8 million of indebtedness
outstanding under the Senior Bank Facility and the approximately $5.0 million
outstanding under the Interim Facility (as defined herein). The Senior Bank
Facility consists of a revolving credit facility of up to $75.0 million. As of
March 30, 1999, the Company had approximately $72.4 million of indebtedness
outstanding (which includes a letter of credit of $189,000) under the Senior
Bank Facility. Amounts outstanding under the Senior Bank Facility bear
interest, at the option of the Company, at either (i) the Eurodollar Rate (as
defined therein) or (ii) the Base Rate (as defined therein), plus the
Applicable Margin (as defined therein). At December 31, 1998, the applicable
interest rate was 8.63% (and was 7.93% as of March 30, 1999). Borrowings under
the Senior Bank Facility are subject to various conditions precedent,
including the maintenance of certain financial covenants. Such financial
covenants require the Company to comply with specified financial ratios and
minimum tests, including minimum interest coverage ratios and maximum leverage
ratios.
 
  Since the last quarter of 1997, the Company has experienced difficulty
meeting certain of the Senior Bank Facility financial covenants. Since
November 1997 and through March 30, 1999, the Company has obtained several
waivers in respect of certain financial covenants and amended the Senior Bank
Facility on 13 occasions in connection therewith.
 
  In August 1998, the Company required funds under the Senior Bank Facility at
a time when the Company did not meet certain financial conditions for
additional borrowings thereunder. To induce the Lenders to waive the financial
conditions for a limited time and to allow the Company to borrow additional
amounts under the Senior Bank Facility, Holdings' principal stockholder,
BGFVF, agreed to deliver for the benefit of the Lenders under the Senior
Credit Facility a letter of credit for $12.5 million to support the full
amount of the additional borrowings by the Company at that time. To induce
BGFVF to issue the letter of credit, Holdings agreed in the August Contingent
Reimbursement Agreement that if the Lenders ever called upon BGFVF's letter of
credit, Holdings would be required to reimburse BGFVF by issuing to BGFVF
shares of Holdings preferred stock.
 
  In November 1998, Bank of America agreed to provide the Company with $5.0
million of short-term capital under a separate facility (the "Interim
Facility") to allow the Company to issue new equity and debt securities on or
before December 15, 1998 (which was subsequently extended through January 14,
1999). Bank of America required that all amounts borrowed under the Interim
Facility be guaranteed by BGFVF. The purpose of the
 
                                      25
<PAGE>
 
Interim Facility was to provide short-term capital to the Company prior to the
completion of a proposed (but never completed) transaction involving the
issuance of equity and debt by the Company, the refinancing of the Senior Bank
Facility and the exchange of the Notes. The November Contingent Reimbursement
Agreement entered into in connection with the Interim Facility provided that
if BGFVF was ever required to fund any amount under the guarantee, Hollywood
would be required to reimburse BGFVF by issuing senior subordinated debt and
Holdings would be required to issue to BGFVF shares of a new series of senior
convertible preferred stock.
 
  In January 1999, the Company required additional borrowings under the Senior
Bank Facility to continue operations, but again did not meet certain
applicable borrowing conditions. The Company was unable to borrow the
additional funds it required from its bank lenders. On January 14, 1999, with
the financial backing of BGFVF, the Company received a waiver of certain
financial covenants under the Senior Bank Facility until June 30, 1999 and the
Senior Bank Facility was amended to increase the loan commitment thereunder
from $50.0 million to $75.0 million and to permit affiliates of the Company to
participate in any loans made thereunder. In connection with obtaining such
waivers and amending the Senior Bank Facility, BGFVF entered into a
Participation Agreement (the "Participation Agreement") with the Lenders,
pursuant to which BGFVF purchased a $12.5 million junior participation in
loans previously funded under the Senior Bank Facility (and theretofore backed
by BGFVF's $12.5 million letter of credit) and agreed to fund additional
borrowings by the Company under the Senior Bank Facility, if any. All of the
institutional investors of Holdings were offered the opportunity to become a
party to the Participation Agreement, but only BGFVF elected to do so. All
future loans under the Senior Bank Facility were made contingent on BGFVF's
agreement, in each case, to fund such borrowings pursuant to the Participation
Agreement. At that time, (i) BGFVF committed, subject to certain conditions,
to fund at least $4.0 million of additional borrowings thereunder for the
Company's working capital needs; (ii) the final maturity of the Senior Bank
Facility was moved from August 7, 2002 to June 30, 1999; (iii) the Company
borrowed approximately $5.0 million under the Senior Bank Facility to repay
all principal and interest under and to terminate the Interim Facility; and
(iv) the Lenders extinguished the $12.5 million letter of credit and Interim
Facility guarantee previously supplied by BGFVF. In addition, effective as of
January 27, 1999, the August Contingent Reimbursement Agreement and the
November Contingent Reimbursement Agreement were terminated.
 
  On February 1, 1999, the Company failed to make a scheduled interest payment
on the Notes, which constituted an event of default under the Senior Bank
Facility. On February 1, 1999, the Company and the Lenders entered into a
Forbearance Agreement whereby the Lenders waived such event of default until
March 1, 1999. On March 4, 1999, the Company and the Lenders entered into a
second Forbearance Agreement whereby the Lenders again waived, subject to
certain conditions, such event of default until the earlier of (i) the
consummation or expiration of the Offer (as defined below); (ii) April 30,
1999; or (iii) the termination of such Forbearance Agreement in accordance
with its terms. Although the Lenders have entered into the second Forbearance
Agreement, such Lenders are still permitted to deliver a "blockage notice" to
the Trustee to prohibit the payment of any principal of, premium or interest
on, or in respect of the purchase or other acquisition of, or defeasance of,
the Notes.
 
  Since the Company did not make such scheduled interest payment on the Notes
on or prior to March 3, 1999, an Event of Default occurred under the
Indenture. The occurrence of such Event of Default under the Indenture allows
the Trustee and the holders of at least 25% in aggregate principal amount of
Notes to declare all of the Notes to be immediately due and payable. However,
the current Forbearance Agreement with the Lenders provides that such
agreement will terminate immediately and automatically upon the exercise of
any right or remedy under the Indenture by any party.
 
  At March 30, 1999, the Company had approximately $72.4 million of
indebtedness outstanding (which includes a letter of credit of $189,000) under
the Senior Bank Facility, of which (i) approximately $37.5 million (the
"Nonparticipation Obligations") was funded by the Lenders and (ii)
approximately $34.9 million (the "Participation Obligations") was funded by
BGFVF through the Participation Agreement. Pursuant to the terms of the
Participation Agreement, amounts repaid under the Senior Bank Facility will be
applied first to pay in full all Nonparticipation Obligations, and second to
pay in full all Participation Obligations. The Company intends to use the
proceeds from the Recapitalization Transactions (as defined and discussed
below) to repay and retire the
 
                                      26
<PAGE>
 
Senior Bank Facility and to fund the Offer and the Consent Solicitation (as
defined below). The availability of any future borrowings under the Senior
Bank Facility, under which a total of $2.6 million was available as of March
30, 1999, is subject to BGFVF's agreement to fund such borrowings pursuant to
the Participation Agreement.
 
  The Company does not currently have adequate liquidity or available sources
of financing to meet its contractual debt obligations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
If the Company is not able to consummate the Recapitalization Transactions for
any reason, including the failure to consummate the Offer, and if the amounts
due under the Senior Bank Facility or the Notes are accelerated as described
above, the Company will not have sufficient resources, and may not have access
to sufficient resources, to satisfy timely its obligations under the Senior
Bank Facility or to satisfy the Notes, including the repayment of all amounts
outstanding thereunder. Regardless of whether the Senior Bank Facility or the
Notes are accelerated, if the Recapitalization Transactions are not
consummated, there is a substantial prospect that the Company and Holdings
would be required to seek protection under the U.S. Bankruptcy Code.
 
 Proposed Recapitalization Transactions
 
  On March 3, 1999, the Company announced a proposed recapitalization of the
Company sponsored by GTCR Fund VI, L.P., an investment fund managed by GTCR
Golder Rauner ("GTCR Fund VI"), that would include the following concurrent
transactions (collectively, the "Recapitalization Transactions"):
 
    (i) the merger (the "Merger") of a wholly-owned subsidiary of Wallace
  Theater Corporation II, a California corporation ("Wallace Theaters"), with
  and into Holdings (which, upon completion of the Merger, would be the
  "Surviving Corporation" and a wholly-owned subsidiary of Wallace Theaters);
 
    (ii) the repayment of all currently outstanding senior indebtedness
  (approximately $72.4 million (which includes a letter of credit of
  $189,000) at March 30, 1999) under the Senior Bank Facility, the funding of
  the consideration to be paid to holders of the Notes pursuant to the Offer
  and the Consent Solicitation (as defined below), the repayment of certain
  construction liabilities and other liabilities of the Company in the amount
  of approximately $6.5 million and $2.3 million, respectively, and the
  payment of approximately $12.0 million in fees and expenses related to the
  Offer, the Consent Solicitation and the Recapitalization Transactions,
 
    (iii) the recapitalization of Wallace Theaters (the "Wallace
  Recapitalization") that will include repaying the currently outstanding
  indebtedness of Wallace Theaters, purchasing the equity interests in the
  entities currently comprising Wallace Theaters (except for certain retained
  minority interests) and funding the completion of certain construction
  projects of Wallace Theaters;
 
    (iv) the incurrence of approximately $170.0 million of indebtedness
  pursuant to a new $185.0 million senior bank facility (the "New Senior Bank
  Facility") to be entered into by the Surviving Corporation and the Company,
  as co-borrowers (and for which a commitment letter has been obtained from a
  major money center bank); and
 
    (v) the funding of an aggregate equity contribution of approximately
  $93.6 million by Scott Wallace and GTCR Fund VI (to be accomplished, in
  part, through Scott Wallace's retention of a portion of his equity in
  Wallace Theaters).
 
The Company intends to designate all indebtedness under the New Senior Bank
Facility as Designated Senior Debt and Guarantor Designated Senior Debt, as
applicable, for purposes of the Indenture (as amended by the Supplemental
Indenture (as defined below)).
 
  The Recapitalization Transactions are conditioned upon, among other things,
the satisfaction of (i) the valid tender (without subsequent withdrawal) of at
least 85% of the aggregate principal amount of the Notes prior to the time and
date of the expiration of the Offer and (ii) the receipt of consents to
certain amendments to the Indenture from holders representing a majority of
the outstanding Notes prior to the time and date of the expiration of the
right to receive the consent payment under the Offer (the "Consent Expiration
Time"). The consummation of the Merger is subject to a number of conditions,
including the consummation of the Wallace
 
                                      27
<PAGE>
 
Recapitalization and the closing of the financing to be obtained pursuant to
the New Senior Bank Facility, satisfaction or waiver of which conditions and
certain other conditions are outside of the Company's or Holding's control.
 
  On March 5, 1999, as part of the Recapitalization Transactions, the Company
announced an offer to purchase for cash from registered holders of the Notes
(each, a "Holder"), on the terms and subject to the conditions set forth in an
Offer to Purchase and Consent Solicitation Statement (as the same may be
amended and supplemented from time to time, the "Offer and Consent
Solicitation Statement") mailed to such Holders and in the accompanying
Consent and Letter of Transmittal (as the same may be amended and supplemented
from time to time, the "Letter of Transmittal" and, together with the Offer
and Consent Solicitation Statement, the "Offer"), all of the Notes for total
consideration (including consideration for the delivery of a Consent (as
defined below) prior to the Consent Expiration Time) of $700 per $1,000 in
principal amount of tendered Notes. The Offer is being made in connection
with, and is conditioned upon the consummation of, the proposed
Recapitalization Transactions.
 
  Also on March 5, 1999, the Company commenced a solicitation (the "Consent
Solicitation") of consents (the "Consents") from Holders to amend or eliminate
certain restrictive covenants and other provisions (the "Proposed Amendments")
contained in the Indenture. The purposes of the Consent Solicitation and the
Proposed Amendments are to enable the Recapitalization Transactions to be
consummated, to eliminate the Company's obligation to make an offer to
purchase the Notes following the "Change of Control" (as defined in the
Indenture) resulting from the Merger and to eliminate certain restrictions
imposed by the Indenture on the Company in order to provide the Company with
significant operational flexibility after the consummation of the
Recapitalization Transactions. Consents from Holders of a majority in
aggregate principal amount of the Notes outstanding are required to approve
the Proposed Amendments (the "Required Consents"). If the Company receives the
Required Consents prior to the Consent Expiration Time, then the Company
intends to notify the Trustee and seek the execution and delivery of a
supplemental indenture to give effect to the Proposed Amendments (the
"Supplemental Indenture") as soon as practicable following the Consent
Expiration Time, although the Proposed Amendments (other than one amendment
that provides that Consents once delivered may not thereafter be revoked,
except under certain circumstances, which amendment will become operative upon
execution of the Supplemental Indenture) will not become operative until all
conditions to the Offer have been met or waived by the Company.
 
Year 2000 Impact
 
  Year 2000 issues result from the inability of certain computer programs or
equipment to accurately calculate, store or use a date subsequent to December
31, 1999. The erroneous date can be interpreted in a number of different ways;
typically the year 2000 is interpreted as the year 1900. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions
or engage in similar normal business.
 
  The Company has recently converted its core financial software system and
has substantially completed a review of its other internal information systems
to insure they are functional in the Year 2000. As of December 31, 1998, the
Company had spent approximately $980,000 regarding Year 2000 issues. Although
the Company's review has not been finalized, the Company estimates that the
remaining remediation costs related to Year 2000 issues will be less than
$250,000. The potential impact, if any, of these less critical systems not
being Year 2000 compliant will at most require employees to manually complete
otherwise automated tasks or calculations and it should not significantly
impact the Company's ability to conduct business.
 
  The Company is in the process of investigating the Year 2000 compliance of
its customers, suppliers and other third parties with whom is has business
relationships. Compliance by such third parties is voluntary and failures
could occur, in which case there is the possibility of a material adverse
effect on the Company. However, the nature of the Company's business and its
business relationships are not such that the Company considers the potential
Year 2000 compliance failure of a third party with whom it has a direct
business relationship likely to have a material adverse effect on the Company.
 
  The Company also relies on non-information technology systems, such as
office telephones, facsimile machines, air conditioning, heating, elevators in
its leased offices, which may have embedded technology such
 
                                      28
<PAGE>
 
as micro controllers. Some of these systems are outside of the Company's
control to assess or remedy. A failure of one of these items might impact the
Company's business but in management's opinion, would not create a material
disruption.
 
  In light of its compliance efforts, the Company does not believe that the
year 2000 issue will materially adversely affect operations or results of
operations, and does not expect implementation to have a material impact on
the Company's financial statements. However, there can be no assurance that
the Company's systems will be Year 2000 compliant prior to December 31, 1999,
or that the failure of any such system will not have a material adverse effect
on the Company's business, operating results and financial condition. To the
extent the Year 2000 problem has a material adverse effect on the business,
operations or financial condition of third parties with whom the Company has
material relationships, such as vendors, suppliers and financial institutions,
the Year 2000 problem could also have a material adverse effect on the
Company's business, results of operations and financial condition.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
  The Company's outstanding indebtedness as of December 31, 1998 was comprised
of the $110.0 million principal amount outstanding of Notes, the approximately
$49.8 million of indebtedness outstanding under the Senior Bank Facility and
the approximately $5.0 million outstanding under the Interim Facility. The
Notes bear interest at a fixed rate and the interest on the indebtedness
outstanding under the Senior Bank Facility and the Interim Facility fluctuates
with certain lending rates. All of the outstanding indebtedness under the
Senior Bank Facility (which currently includes the approximately $5.0 million
that was previously outstanding under the Interim Facility) is due in 1999.
Therefore, the Company does not believe it has a material exposure to
fluctuations in interest rates.
 
  In addition, all of the Company's revenues and expenses are denominated in
United States dollars. Accordingly, the Company does not have a material
exposure to fluctuations in foreign currencies.
 
Item 8. Financial Statements and Supplementary Data
 
  The Financial Statements of the Company required by this Item 8 are included
as part of Item 14(a)(1) hereof.
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
 
  None.
 
                                      29
<PAGE>
 
                                   PART III
 
Item 10. Directors and Executive Officers of the Registrant
 
  The following table sets forth certain information regarding the Company's
and Holdings' directors, executive officers and key employees as of the date
of this document, including their respective ages.
 
<TABLE>
<CAPTION>
          Name           Age                             Position
          ----           --- ----------------------------------------------------------------
<S>                      <C> <C>
Thomas W. Stephenson,
 Jr.....................  44 President, Chief Executive Officer and Chairman of the Board
Robert E. Painter.......  53 Chief Operating Officer and Assistant Secretary
James R. Featherstone...  43 Chief Financial Officer, Vice President, Secretary and Treasurer
John G. Farmer..........  51 Director
Thomas L. Harrison......  48 Director
Thomas G. Mendell.......  52 Director
Harold W. Pote..........  52 Director
Eric R. Wilkinson.......  43 Director
Gary C. Golden..........  50 Head Film Buyer
</TABLE>
 
  Thomas W. Stephenson, Jr. has served as a director and the President and
Chief Executive Officer of the Company and Holdings since June 1995. From 1987
to 1995, Mr. Stephenson was President of LSI Capital, L.L.C., an acquisition
and advisory group, which he founded in 1987. During 1986, Mr. Stephenson was
President of Inwood Capital, a real estate merchant banking firm. From 1984 to
1987, Mr. Stephenson was a partner and Chief Financial Officer of Criswell
Development Company, a real estate investment company. From 1978 to 1984, Mr.
Stephenson was employed by the investment bank of Merrill Lynch.
 
  Robert E. Painter has served as Chief Operating Officer of the Company and
Holdings since September 1996. Prior to that time, Mr. Painter was a
consultant for the IMAX Corporation from 1995 to 1996. From 1991 to 1995, Mr.
Painter was employed by General Cinema Theatres as its Senior Vice President
of Operations. From 1989 to 1991, Mr. Painter served as Senior Operations
Officer for Staff Builders Health Care, Inc. From 1967 to 1989, Mr. Painter
was employed by General Cinema Theatres, most recently as its Senior Vice
President of Operations.
 
  James R. Featherstone has served as Chief Financial Officer of the Company
and Holdings since July 1996. From April 1996 to June 1996, Mr. Featherstone
served as a consultant to the Company. From June 1982 to July 1995, Mr.
Featherstone served as Vice President of Citicorp and later as Managing
Director of Citicorp Securities.
 
  John G. Farmer has served as a director of the Company and Holdings since
May 1996. In addition, since October 1994, Mr. Farmer has served as Managing
Director of Stratford Capital Partners, L.P. and Stratford Equity Partners,
L.P. From June 1990 to October 1994, Mr. Farmer served as Senior Vice
President of GE Capital Corporation, Corporate Finance Group.
 
  Thomas L. Harrison has served as a director of the Company and Holdings
since May 1997. Since 1995, Mr. Harrison has also served as a Principal and
President of Hoak Capital Corporation. From 1989 to 1995, Mr. Harrison served
as a Principal and as Managing Director of Haas, Wheat & Harrison,
Incorporated and from 1984 to 1989, he served as a Principal and as Senior
Vice President of Hicks & Haas, Incorporated.
 
  Thomas G. Mendell has been a director of the Company and Holdings since
September 1996. In addition, since April 1994, Mr. Mendell has been a Partner
of The Beacon Group, L.L.C. and serves as a director of several private
companies. From November 1986 to December 1993, Mr. Mendell was a Partner of
Goldman Sachs & Co.
 
                                      30
<PAGE>
 
  Harold W. Pote has been a director of the Company and Holdings since
September 1996. Since January 1993, Mr. Pote also has been a Partner of The
Beacon Group L.L.C. Prior to the formation of The Beacon Group, L.L.C., Mr.
Pote was Chief Executive Officer of First Fidelity Bancorporation. Mr. Pote
currently serves as a director of Norfolk Southern Corp. and previously served
as director of Smith Klein-Beecham, Inc.
 
  Eric R. Wilkinson has been a director of the Company and Holdings since
September 1996. In addition, since December 1995, Mr. Wilkinson has been a
Partner of The Beacon Group L.L.C. From March 1994 to December 1995, Mr.
Wilkinson served as a Principal of The Beacon Group L.L.C. From March 1989 to
March 1994, Mr. Wilkinson served as a Partner and a director of Apax Partners,
a $300.0 million private overseas equity fund.
 
  Gary Golden has been in the theater industry since 1968. He became Head Film
Buyer for the Company in October 1997. Prior to that time, he was Senior Vice
President/Head Film Buyer for Cobb Theaters from 1996-1997. From 1976-1979 he
was a Film Buyer for General Cinema Theatres and then later returned to
General Cinema in 1990, where he was Regional Vice President of Film until
1995. He was the Southern Division Manager for Lorimar Releasing from 1988-
1989. Prior to that time, he was with other film companies, including United
Artists, Gulf States Theatres, AMC, Commonwealth Theatres, Pacific Drive-Ins,
Cinerama and United Pictures.
 
  Each director of Holdings and the Company holds office until the next annual
meeting of stockholders of the Company or until his successor is duly elected
and qualified. All officers are elected annually and serve at the discretion
of the respective Board of Directors. The number of members on each Board of
Directors is fixed by the affirmative vote of a majority of the members at any
time constituting such Board of Directors. Presently, the Board of Directors
of each of Holdings and the Company consists of six members. Directors on each
such Board are reimbursed for all expenses actually incurred for each Board
meeting which such directors attend. Each director may receive additional
compensation for his services as the respective Board of Directors may
determine. The executive officers of the Company and Holdings are elected by
the respective Board of Directors to serve at the discretion of such Board.
 
                                      31
<PAGE>
 
Item 11. Executive Compensation
 
  The following table sets forth the compensation for fiscal years 1998, 1997
and 1996 awarded to or earned by the chief executive officer of the Company
and the two other most highly compensated executive officers of the Company
whose contractual base salary and bonus exceeded $100,000 for services
rendered in all capacities.
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                         Annual Compensation
                                                         -----------------------
                                                                       Other
                                                 Salary   Bonus     Compensation
Name                                        Year   ($)     ($)          ($)
----                                        ---- ------- -------    ------------
<S>                                         <C>  <C>     <C>        <C>
Thomas W. Stephenson, Jr.--CEO............. 1998 313,887     --        10,592
                                            1997 285,577  86,815(2)    16,546
                                            1996 182,065 225,000          -- (1)
Robert E. Painter--COO(3).................. 1998 204,848     --        10,592
                                            1997 181,731  55,290(2)    11,462
                                            1996  47,580  60,000          -- (1)
James R. Featherstone--CFO(3).............. 1998 124,373     --        10,592
                                            1997 114,231  23,250(2)    11,681
                                            1996  52,515  50,000          -- (1)
</TABLE>
--------
(1) The named executive officers did not receive annual compensation not
    properly categorized as salary or bonus, except for certain perquisites
    and other personal benefits, which are not shown because the aggregate
    amount of such compensation for each of the named executive officers,
    during the fiscal year, did not exceed the lesser of $50,000 or 10% of
    total salary and bonus reported for such executive officer.
(2) Mr. Stephenson received $28,900 in cash and 297 shares in Holdings Common
    Stock. Mr. Painter received $27,600 in cash and 142 shares in Holdings
    Common Stock. Mr. Featherstone received $11,550 in cash and 60 shares in
    Holdings Common Stock. The Holdings Common Stock was issued with an
    assumed fair market value of $195.00 per share, which is the price at
    which Holdings had last issued shares of Holdings Common Stock in May
    1997.
(3) Mr. Painter and Mr. Featherstone joined the Company in September 1996 and
    July 1996, respectively.
 
                                      32
<PAGE>
 
  The Company did not grant any stock options in fiscal year 1998 to any of
the executive officers named in the Summary Compensation Table and such
executive officers did not exercise any stock options. The table below sets
forth information concerning the number of exercisable and unexercisable
options for shares of Holdings Common Stock held by such individuals and the
fiscal year-end value of such exercisable and unexercisable options at
December 31, 1998.
 
   AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR ANDFISCAL YEAR-END OPTION
                                    VALUES
<TABLE>
<CAPTION>
                                                         Number of
                                                   Securities Underlying     Value of Unexercised
                                                    Unexercised Options      In-the-Money Options
                                                    at Fiscal Year-End     at Fiscal Year-End ($)(1)
                                                 ------------------------- -------------------------
                           Shares
                         Acquired On    Value
          Name           Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
          ----           ----------- ----------- ----------- ------------- ----------- -------------
<S>                      <C>         <C>         <C>         <C>           <C>         <C>
Thomas W. Stephenson,
 Jr.....................     --          --         5,842        8,761         --           --
Robert E. Painter.......     --          --         2,920        4,382         --           --
James R. Featherstone...     --          --         1,460        2,191         --           --
</TABLE>
--------
(1) Assumes a current market value below the $175.00 per share exercise price.
 
Stock Award Plan
 
General
 
  Purpose. Holdings adopted the Hollywood Theater Holdings, Inc. 1996 Stock
Option and Stock Award Plan (the "Stock Award Plan") for the purposes of
strengthening the ability of the Company and its subsidiaries to attract,
motivate and retain employees of superior capability and encouraging valued
employees to have a proprietary interest in the Company. To accomplish these
purposes, the Stock Award Plan provides terms upon which certain eligible
employees of the Company may be granted stock options ("Options"), stock
appreciation rights ("SARs"), restricted stock, performance units or
performance shares and phantom stock rights (collectively, the "Incentive
Awards").
 
  Administration. The Stock Award Plan is administered by a committee (the
"Committee") consisting of two or more non-employee members of the Board of
Directors elected to the Committee by a majority of the Board of Directors.
Presently, the members of the Committee consist of John G. Farmer, Thomas L.
Harrison, and Thomas G. Mendell.
 
  The Committee has the ability to determine, among other things, which
individuals will be granted awards pursuant to the Stock Award Plan and such
Committee has the ability to determine the number of shares of Holdings Common
Stock, Options, SARs, restricted stock awards, performance units or shares or
phantom stock rights that will be subject to each Incentive Award and to
determine the terms and provisions of each Incentive Award.
 
  Shares Subject to Stock Award Plan. An aggregate of 37,000 shares (of which
36,924 shares are subject to currently outstanding Options) of Holdings Common
Stock (subject to certain adjustments) may be issued, transferred or exercised
pursuant to Incentive Awards under the Stock Award Plan. Notwithstanding the
foregoing, the Stock Award Plan imposes certain restrictions regarding
incentive stock options ("ISOs") to comply with the requirements of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"). At the
discretion of the Committee, the shares of Holdings Common Stock delivered
under the Stock Award Plan may be made available from (i) authorized but
unissued shares; (ii) treasury shares; or (iii) previously issued but
reacquired shares (or through a combination thereof).
 
                                      33
<PAGE>
 
Incentive Awards
 
  Options. The Committee may grant either ISOs or non-qualified stock options
to eligible employees. The Committee will not grant any ISOs to an eligible
employee who owns or would own immediately after the grant of such incentive
stock option, directly or indirectly, stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company (unless at
the time of such grant, the incentive stock option price is at least 110% of
fair market value and such option is not exercisable after the expiration of
five years from the date of grant). The purchase price for non-qualified stock
options will be equal to at least the greater of (i) the par value of the
Holdings Common Stock or (ii) 50% of the fair market value of the Holdings
Common Stock on the date of grant. The purchase price for an ISO will be at
least equal to fair market value of the Holdings Common Stock on the date of
grant and the term of such option will not be greater than 10 years.
 
  Stock Appreciation Rights. The Committee may grant an eligible employee SARs
that are connected to an Option or SARs without relation to an Option. Payment
upon exercise of a SAR may be made in shares of Holdings Common Stock valued
at fair market value on the date of exercise or in cash (or a combination of
both). Payment upon exercise of a SAR may be limited by the Committee on the
date of the grant.
 
  Restricted Stock Awards and Performance Awards. The Committee may grant an
eligible employee shares of restricted stock pursuant to the Stock Award Plan.
Shares of restricted stock may not be disposed of until the restrictions are
removed or expire. The Committee may grant an eligible employee Performance
Units or Performance Shares. Such Units and Shares may be granted in such a
manner that more than one performance period may be in progress
simultaneously. The Committee may, at any time, modify the performance
measures as it considers appropriate and equitable. Payments will be made in
cash or Holdings Common Stock (or a combination of both) following the close
of the applicable performance period.
 
  Phantom Stock Rights. Pursuant to the Stock Award Plan, an eligible employee
may be granted a phantom stock right, which entitles such employee, upon
conversion, to receive payment of cash or in shares of Holdings Common Stock
(or both). Such payment of shares upon conversion of a phantom stock right may
be made in shares of restricted stock.
 
  Expiration of Incentive Awards and Effects of Employment Separation. Unless
the Committee otherwise provides, Incentive Awards (whether or not vested)
shall expire immediately and/or be forfeited upon termination of such
employee's employment with the Company or any subsidiary employing such
employee for any reason other than death, disability or retirement. If any
employee ceases to be in the employ of the Company or any of its subsidiaries
by reason of death, disability or upon retirement, any unexercised options or
SARs or outstanding phantom stock units will terminate on the date that is 90
days following the date of death, retirement or disability (unless it expires
by its terms on an earlier date). With respect to Performance Units or
Performance Shares, in the event of death, disability or retirement, the
Performance Units or Shares will continue after the date of the applicable
event for such period of time as determined by the Committee, subject to the
terms of any applicable agreement. Performance shares and phantom stock rights
will be exercisable for cash only in such events.
 
  If an eligible employee who has purchased restricted stock under the Stock
Award Plan terminates employment with the Company for any reason, then all
shares of restricted stock that have not previously vested will be repurchased
by the Company at the cost paid by such employee. In addition, upon an
eligible employee's termination of employment with the Company and all of its
subsidiaries for any reason (including by reason of death or disability), the
Company has the right to purchase from such employee all shares of Holdings
Common Stock hereunder on the terms and conditions set forth in the applicable
Incentive Award.
 
  Adjustment Provisions. Pursuant to the Stock Award Plan, upon the
dissolution or liquidation of the Company; certain types of reorganizations,
mergers or consolidations; the sale of all or substantially all of the assets
of the Company; or a "change of control" (as defined in the Stock Award Plan),
the Committee may determine (without shareholder approval) that all or some
Incentive Awards then outstanding under the Stock Award Plan will be fully
vested and exercisable or convertible, as applicable; determine that some or
all
 
                                      34
<PAGE>
 
restrictions on restricted stock lapse immediately; or determine that there
will be a substitution of new Incentive Awards by such successor employer
corporation or a parent or subsidiary company thereof. In addition, in the
event of a change of control, the Committee may take certain actions, without
shareholder approval, including without limitation acceleration of the
exercise dates of any outstanding SARs or Options or immediate vesting;
acceleration of the restriction (lapse of forfeiture provision) period of any
restricted stock award; grants of SARs to holders of outstanding Options;
payment of cash to holders of Options in exchange for the cancellation of
their outstanding Options; payment for outstanding Performance Units or
Shares; acceleration of the conversion dates of outstanding phantom stock
rights; grants of new Incentive Awards; or other adjustments or amendments to
outstanding Incentive Awards.
 
  Transfer of Incentive Awards. Pursuant to the Stock Award Plan, so long as
the Holdings Common Stock has not been publicly traded for at least 90 days,
any Holdings Common Stock obtained pursuant to an Incentive Award will be
subject to the Company's right of first purchase if the holder of such shares
intends to transfer them. In addition, upon an employee's death, the Company
has the right to purchase all or some of the Holdings Common Stock that such
employee obtained pursuant to an Incentive Award at its fair market value
within nine months of the employee's death.
 
401(k) Plan
 
  The Company maintains a 401(k) Savings Plan (the "401(k) Plan") under
Section 401(k) of the Code. All salaried employees of the Company are eligible
to participate in the 401(k) Plan following such employee's attainment of age
21 and completion of 90 days of employment with the Company. All hourly
employees of the Company are eligible to participate in the 401(k) Plan
following such employee's attainment of age 21 and completion of one year of
employment with the Company. Employees may elect to make pre-tax contributions
to the 401(k) Plan, subject to applicable statutory maximum limits. The
Company may make contributions in such amounts as it may elect. Company
contributions vest 20% in the third year, 40% in the fourth year, 60% in the
fifth year, 80% in the sixth year and 100% in the seventh year of service.
Contributions also will vest fully if the employee reaches retirement age,
becomes permanently disabled or dies (even if such employee has not completed
seven years of service). If employment is terminated before such employee's
contributions have fully vested, the nonvested portion of such contributions
will be forfeited.
 
Employment Agreements
 
  Thomas W. Stephenson, the Company's Chairman of the Board, President and
Chief Executive Officer, James R. Featherstone, the Company's Vice President
and Chief Financial Officer and Robert E. Painter, the Company's Chief
Operating Officer (each, an "Employee"), have each entered into an employment
agreement with the Company.
 
  Each of Messrs. Stephenson's, Featherstone's and Painter's employment
agreements with the Company will expire (unless renewed) on September 30,
1999. Each of such employment agreements provides for a one year automatic
renewal (unless terminated for "due cause") and subsequent one year renewals
by mutual consent of the Employee and the Board of Directors. Each of the
employment agreements for Messrs. Stephenson, Featherstone and Painter
provides for an annual salary of not less than $275,000, $110,000 and
$175,000, respectively, each of which may be increased annually in the sole
discretion of the Board of Directors, and discretionary annual bonus awards
based upon performance criteria established from time to time by the Board of
Directors of the Company. At the time the employment agreements were entered
into, each of Messrs. Stephenson, Featherstone and Painter was also granted
under the Stock Award Plan options to purchase 14,603, 3,651 and 7,302 shares
of Holdings Common Stock, respectively.
 
  Pursuant to the terms of such employment agreements, if an Employee's
employment is terminated by the Company at the end of an employment term, such
Employee will be entitled to receive his full annual salary for a period of
one year from the date of termination. If the Employee's employment is
terminated for "due cause," the Employee will be entitled to receive his
annual salary on a pro rata basis to the date of termination. If the Company
terminates the Employee's employment other than for due cause or because of a
disability, the
 
                                      35
<PAGE>
 
Company will be obligated to pay his full annual salary for a period of one
year from the date of termination. In the event of the Employee's death or
disability, the employment agreement will be terminated and the Employee's
estate or the Employee will be entitled to receive his annual salary through
the end of the month in which he died or became disabled and a cash payment
equal to the pro rata portion (through the end of the month in which he died
or became disabled) of the annual bonus, if any, received by the Employee in
respect of the full calendar year next preceding his death or disability.
 
  Pursuant to such employment agreements, if the Employee's employment is
terminated for due cause or by the Company's failure to renew the Employee's
employment agreement (after the first automatic renewal period), or if the
Employee voluntarily terminates his employment, for a period of one year
thereafter, the Employee will be prohibited from accepting employment or
rendering service to any person, firm or corporation that is engaged in a
business directly competitive with the business then engaged in by the Company
in the states of Texas, Oklahoma, Kansas, Missouri, Ohio, Idaho and any other
state in which the Company owns, leases or operates motion picture theaters at
the time of termination, and from directly or indirectly entering into or in
any manner taking part in or lending his name, counsel or assistance to any
venture, enterprise, business or endeavor, either as proprietor, principal,
investor, partner, director, officer, employee, consultant, advisor, agent,
independent contractor, or in any other capacity whatsoever, for any purpose
that would be competitive with the business of the Company in such states.
 
  Pursuant to Mr. Painter's employment agreement, Mr. Painter is entitled to
reimbursement for certain costs associated with his relocation to Dallas,
Texas.
 
Report on Executive Compensation
 
 Compensation Policies Applicable to Executive Officers
 
 
  The objectives of the Company's executive compensation program are to (i)
attract, motivate and retain the executives responsible for the success of the
Company; (ii) reward key executives based upon corporate and individual
performance; and (iii) provide incentives designed to maximize stockholder
value. The three primary components of the Company's executive officer
compensation program are a base salary, the potential for a performance-based
annual bonus and periodic grants of stock options.
 
  Base Salaries. Base salaries for the Company's executive officers, as well
as changes in such salaries, are based upon a number of factors, including the
nature of the executive's position, the executive officer's contribution to
the performance of the Company, the experience of the executive and the term
of the officer's employment with the Company. Based on these factors, the base
salaries of the Company's executive officers increased by an average of
approximately 10.5% in 1998 as compared to 1997.
 
  Annual Bonuses. Based on the Company's performance, the executive officers
received no bonuses for services rendered in 1998.
 
  Stock Options. In order to align the long-term interests of the executive
officers with those of its stockholders, the Committee from time to time
awards stock options to the Company's executive officers. The terms of these
options, including the size of the grants, are determined by the Committee.
The Company did not grant any stock options in 1998 to any of the executive
officers.
 
 Chief Executive Officer Compensation
 
  In establishing the compensation of Thomas W. Stephenson, the Company's
Chief Executive Officer, the Committee utilized the same compensation criteria
applicable to executive officers in general. For 1998, Mr. Stephenson's annual
base salary was increased by approximately 10%. As with the Company's other
executive officers, Mr. Stephenson received no bonus for services rendered in
1998.
 
                                      36
<PAGE>
 
 Limitations on the Deductibility of Compensation
 
  Section 162(m) of the Code generally disallows a corporate deduction for
compensation over $1.0 million paid to a company's chief executive officer and
any of the four other most highly compensated officers. The $1.0 million
limitation applies to all types of compensation, including restricted stock
awards and amounts realized on the exercise of stock options and stock
appreciation rights, unless the awards and the plan under which the awards are
made qualify as "performance based" under the terms of the Code and related
regulations. Under the regulations, executive compensation pursuant to the
Stock Award Plan should qualify as "performance based" compensation and
therefore be excluded from the $1.0 million limit. Other forms of compensation
provided by the Company, however, are not excluded from such limit. The
Company currently anticipates that compensation of its executive officers will
be deductible under Section 162(m) because executive officer compensation is
presently below the $1.0 million limit and because the Company intends to
continue to utilize performance based compensation in future periods.
 
              John G. Farmer                   Thomas G. Mendell
 
Indemnification Agreement of Thomas W. Stephenson
 
  Thomas W. Stephenson has entered into an indemnification agreement with the
Company and Holdings in connection with certain personal guarantees made by
Mr. Stephenson for obligations of the Company under certain agreements,
including, but not limited to theater leases and film rental agreements and
other similar agreements that Mr. Stephenson may be required to guarantee in
the future (the "Stephenson Guarantees"). Pursuant to such indemnification
agreement, the Company and Holdings have agreed to indemnify Mr. Stephenson
against any and all payments, liabilities, obligations, claims, losses,
damages, commitments, costs, deficiencies, expenses paid or incurred by Mr.
Stephenson under any Stephenson Guarantee and against any and all expenses
(including attorneys' fees), costs, liabilities and obligations paid or
incurred in connection with or as a result of such payments under the
Stephenson Guarantees.
 
Registration Rights Agreements
 
  Holdings and certain of its stockholders, including BGFVF, Stratford,
Richard M. Durwood, as trustee for the Richard M. Durwood Revocable Trust (the
"Durwood Trust"), and the Hoak Entities, have entered into separate
registration rights agreements (the "Registration Rights Agreements").
Pursuant to the terms of the Registration Rights Agreements, at any time after
the earlier of either the closing of an initial public offering of Holdings
Common Stock or October 1999, such stockholders holding at least 10% of all of
the outstanding Holdings Common Stock (the "Demanding Stockholders") at such
date, or the Durwood Trust in certain limited circumstances, have the right to
require Holdings (the "Demand Registration Right") at Holdings' sole cost and
expense, to register under the Securities Act all or part of the Holdings
Common Stock and Holdings Preferred Stock and any shares issuable upon
conversion of the Holdings Preferred Stock, held by such Demanding
Stockholders (the "Registrable Securities"). Each Demanding Stockholder, other
than the Durwood Trust, will have three such Demand Registration Rights. The
other stockholders holding Registrable Securities are entitled to participate
in such demand registrations, subject to certain limitations. In connection
with such registrations, Holdings will agree to indemnify all holders of
Registrable Securities against certain liabilities, including liabilities
under the Securities Act and applicable state securities laws.
 
Shareholders' and Voting Agreement
 
  Holdings entered into an Amended and Restated Shareholders' and Voting
Agreement (the "Shareholders' Agreement") with certain holders of Holdings
Common Stock (or securities convertible into, or exchangeable or exercisable
for, Holdings Common Stock) which contains provisions with respect to the
voting, transfer and registration of the Holdings Common Stock (or securities
convertible, exchangeable or exercisable for, Holdings Common Stock) held by
the parties.
 
  Pursuant to the Shareholders' Agreement, if at any time prior to a public
offering of the shares of Holdings Common Stock, BGFVF holds (i) at least 50%
of the outstanding Holdings Common Stock or any shares of
 
                                      37
<PAGE>
 
Holdings Series A Preferred Stock, BGFVF will have the right to designate
three persons to serve on the Board of Directors of Holdings; (ii) 25% or more
of the outstanding Holdings Common Stock but less than 50%, BGFVF will have
the right to designate two directors to serve on the Board of Directors of
Holdings; and (iii) 5% or more of the outstanding Holdings Common Stock but
less than 25%, BGFVF will have the right to designate one person to serve on
the Board of Directors of Holdings. If at any time prior to a public offering
of the shares of Holdings Common Stock, Stratford holds 5% or more of the
outstanding Holdings Common Stock, Stratford will have the right to designate
one person to serve on the Board of Directors of Holdings. If at any time
prior to a public offering of the shares of Holdings Common Stock, the Hoak
Entities hold 5% or more of the outstanding Holdings Common Stock, the Hoak
Entities will have the right to designate one person to serve on the Board of
Directors of Holdings. In addition, the Chief Executive Officer of Holdings
will serve as a member of the Board of Directors of Holdings at any time prior
to a public offering of the Holdings Common Stock.
 
  From and after a public offering of the Holdings Common Stock, so long as
BGFVF holds 25% or more of the outstanding Holdings Common Stock, all of the
parties to the Shareholders' Agreement will be required to vote for at least
two persons who are designated by BGFVF. If BGFVF holds 5% or more (but less
than 25%) of the outstanding Holdings Common Stock, all of the parties to the
Shareholders' Agreement will be required to vote for at least one person who
is designated by BGFVF . Each stockholder that is a party to the Shareholders'
Agreement has granted BGFVF an irrevocable proxy to vote such stockholder's
shares for the election of those directors that are designated by BGFVF
pursuant to the Shareholders' Agreement. Pursuant to the Shareholders'
Agreement, the Board of Directors of Holdings will be composed of no more than
six directors. A director designated by BGFVF, Stratford or the Hoak Entities
cannot be removed without the consent of BGFVF, Stratford or the Hoak Entities
as applicable. BGFVF, Stratford and the Hoak Entities may remove its designee
from the Board of Directors at any time with or without cause.
 
  If, for any reason, a designee of BGFVF or Stratford or the Hoak Entities is
not on the Board of Directors, and BGFVF, Stratford and the Hoak Entities each
holds 5% or more of the outstanding Holdings Common Stock, each of BGFVF,
Stratford and the Hoak Entities will be entitled to have one observer selected
by each of them present at all meetings of the Board of Directors of Holdings.
In addition, if a director of Holdings or an observer is a designee of BGFVF,
Stratford or the Hoak Entities and such director or observer is not able to
attend the respective Board of Directors meeting, BGFVF, Stratford and the
Hoak Entities have the right to designate a representative to attend and
observe such meeting on behalf of such director or observer.
 
  The Shareholders' Agreement requires each party to give Holdings and each
other stockholder who is a party to the Shareholders' Agreement certain
notices with respect to any proposed sales or transfers of Holdings Common
Stock (or securities convertible, exchangeable or exercisable for Holdings
Common Stock) and to offer to Holdings and each of the stockholders who is a
party to the Shareholders' Agreement, the right to purchase such stock which
the party otherwise proposes to sell or transfer. In addition, if any
stockholder desires to sell a number of shares of Holdings Common Stock (or
securities convertible, exchangeable or exercisable for Holdings Common Stock)
which in the aggregate represent at least 5% of the outstanding Holdings
Common Stock, then such stockholder must give certain notices with respect to
the proposed sale or sales and each of the stockholders who is a party to the
Shareholders' Agreement will have the right to sell a proportionate amount of
its Holdings Common Stock (or securities convertible, exchangeable or
exercisable for Holdings Common Stock). If BGFVF elects to transfer or
exchange all of the shares of Holdings Common Stock (or securities
convertible, exchangeable or exercisable for Holdings Common Stock) that it
holds at a price of at least $200 per share, then, upon 30 days notice, each
other stockholder (that is a party to the Shareholders' Agreement) will be
obligated to sell or transfer to such third party, all of his or her shares of
Holdings Common Stock (or securities convertible, exchangeable or exercisable
for Holdings Common Stock) in the same transaction.
 
  Pursuant to the Shareholders' Agreement, any stockholder that is a party to
the Shareholders' Agreement and that owns more than 5% of the Holdings Common
Stock at the time Holdings proposes to issue additional shares of Holdings
Common Stock or Holdings Preferred Stock (as defined), will have preemptive
rights with respect to such shares. In addition, at any time on or after
October 31, 2001, and provided that an offering of Holdings Common Stock has
not then occurred, the Durwood Trust may require Holdings to repurchase not
less than all of the shares of Holdings Common Stock held by each at the fair
market value at the time of repurchase.
 
                                      38
<PAGE>
 
Item 12. Security Ownership of Certain Beneficial Owners and Management
 
 
  The Company is a wholly-owned subsidiary of Holdings. The following table
and the accompanying footnotes set forth, as of March 30, 1999, the beneficial
ownership of Holdings' capital stock by each person (i) who is known to the
Company to own beneficially more than 5% of the outstanding Holdings Common
Stock, Holdings Series B Preferred Stock, Holdings Series C Preferred Stock or
Holdings Series D Preferred Stock; (ii) each director and named executive
officer of the Company; and (iii) all directors and executive officers of the
Company as a group. Except as otherwise indicated, the persons or entities set
forth in the table below have sole investment and voting power with respect to
all shares shown as beneficially owned, subject to community property laws,
where applicable. The business address of each executive officer is c/o
Hollywood Theaters, Inc., 2911 Turtle Creek Blvd., Suite 1150, Dallas, Texas,
75219.
 
<TABLE>
<CAPTION>
                                 Number of Shares(1)                          Percent of Class
                          ------------------------------------------ -----------------------------------
                                           Preferred Stock                         Preferred Stock
                                      ------------------------------          --------------------------
                          Common                                      Common
    Name and Address       Stock      Series B     Series C Series D Stock(2) Series B Series C Series D
    ----------------      -------     --------     -------- -------- -------- -------- -------- --------
<S>                       <C>         <C>          <C>      <C>      <C>      <C>      <C>      <C>
Thomas W. Stephenson,
 Jr.....................    8,465(3)      132          --       --      6.7%       *      --       --
 
John G. Farmer(4).......      --          --           --       --      --       --       --       --
c/o Stratford Capital
 Partners, L.P
200 Crescent Court,
 Suite 1650
Dallas, Texas 75201
 
Thomas L. Harrison(5)...      --          --           --       --      --       --       --       --
c/o Hoak Capital
 Corporation
One Galleria Tower
13355 Noel Road, Suite
 1050
Dallas, Texas 75240
 
Thomas G. Mendell(6)....      880(7)       71          --       --        *        *      --       --
c/o The Beacon Group
 III-
 Focus Value Fund, L.P.
399 Park Avenue, 17th
 Floor
New York, New York 10022
 
Eric R. Wilkinson(8)....      --          --           --       --      --       --       --       --
c/o The Beacon Group
 III-
 Focus Value Fund, L.P.
399 Park Avenue, 17th
 Floor
New York, New York 10022
 
Harold W. Pote(9).......      --          --           --       --      --       --       --       --
c/o The Beacon Group
 III-
 Focus Value Fund, L.P.
399 Park Avenue, 17th
 Floor
New York, New York 10022
 
James R.
 Featherstone(10).......    1,520         --           --       --      1.3%     --       --       --
 
Robert E. Painter(11)...    3,063         --           --       --      2.5%     --       --       --
 
The Beacon Group III-
 Focus Value Fund,
 L.P.(12)...............  316,243(13) 156,057(14)   41,909   45,749    86.9%    80.4%    45.7%    66.7%
399 Park Avenue, 17th
 Floor
New York, New York 10022
 
Hoak Communications
 Partners, L.P.(15).....   62,516(16)     --        37,940   10,480    37.1%     --      41.4%    15.3%
c/o Hoak Capital
 Corporation
One Galleria Tower
13355 Noel Road, Suite
 1050
Dallas, Texas 75240
</TABLE>
 
                                      39
<PAGE>
 
<TABLE>
<CAPTION>
                                 Number of Shares(1)                              Percent of Class
                          -------------------------------------------    -----------------------------------
                                          Preferred Stock                              Preferred Stock
                                     --------------------------------             --------------------------
                          Common                                          Common
    Name and Address      Stock      Series B    Series C    Series D    Stock(2) Series B Series C Series D
    ----------------      ------     --------    --------    --------    -------- -------- -------- --------
<S>                       <C>        <C>         <C>         <C>         <C>      <C>      <C>      <C>
HCP Capital Fund,
 L.P.(17)...............   5,336(18)     --       3,262          862        4.3%     --      3.6%      1.3%
One Galleria Tower
13355 Noel Road, Suite
 1050
Dallas, Texas 75240
 
Stratford Capital
 Corporation(19) .......  53,921(20)  31,012(21)  8,393(22)   11,439(23)   31.5%    16.0%    9.2%     16.7%
200 Crescent Court,
 Suite 1650
Dallas, Texas 75201
 
Richard M. Durwood .....  16,413         --         --           --        13.7%     --      --        --
Revocable Trust
406 West 34th St., Suite
 614
Kansas City, Missouri
 06411
 
All of the directors and
 executive officers as a
 group..................  13,928(24)     203        --           --        10.7%       *     --        --
</TABLE>
--------
*  Less than one percent (1%).
(1) The information contained in this table with respect to beneficial
    ownership reflects "beneficial ownership" as defined in Rule 13d-3 under
    the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
    computing the number of shares beneficially owned by a person and the
    percentage ownership of that person, (i) shares of Holdings Common subject
    to options or warrants held by that person that are exercisable on March
    30, 1999 or become exercisable within 60 days following March 30, 1999 and
    (ii) shares of Holdings Preferred Stock of any series that are convertible
    into shares of Holdings Common Stock on March 30, 1999 or become
    convertible within 60 days following March 30, 1999 are deemed
    outstanding. However, such shares are not deemed outstanding for the
    purpose of computing the percentage ownership of any other person. All
    information with respect to the beneficial ownership of any stockholder
    has been furnished by such stockholder and, unless otherwise indicated,
    each stockholder has sole voting and investment power with respect to the
    shares listed as beneficially owned by such stockholder, subject to
    community property laws where applicable.
(2) The following reflects the total voting power represented by the capital
    stock of Holdings held by each of the indicated persons, assuming all such
    persons (i) exercised all outstanding options and warrants to purchase
    Holdings Common Stock that are presently exercisable and (ii) converted
    all outstanding shares of Holdings Preferred Stock that are presently
    convertible into shares of Holdings Common Stock held by all such persons:
    Mr. Stephenson--1.8%; Mr. Farmer--0%; Mr. Harrison--0%; Mr. Mendell--0.2%;
    Mr. Wilkinson--0%; Mr. Pote--0%; Mr. Featherstone--0.3%; Mr. Painter--
    0.6%; BGFVF--66.2%; Hoak Communications Partners, L.P.--13.1%; HCP Capital
    Fund, L.P.--1.1%; Stratford Capital Corporation L.P.--11.3%; Richard M.
    Durwood--3.4%; and all directors and officers as a group--2.9%.
(3) Includes (i) 132 shares of Holdings Common Stock issuable at any time upon
    conversion of the same number of shares of Holdings Series B Preferred
    Stock owned by Mr. Stephenson and (ii) 5,842 shares of Holdings Common
    Stock subject to employee stock options that are currently exercisable and
    does not include the 8,761 shares of Holdings Common Stock subject to
    employee stock options that are not currently exercisable.
(4) Does not include (i) 3,077 shares of Holdings Common Stock, 31,012 shares
    of Holdings Series B Preferred Stock or 8,393 shares of Holdings Series C
    Preferred Stock owned of record by Stratford Capital Partners, L.P.
    ("Stratford Capital"); (ii) 11,439 shares of Holdings Series D Preferred
    Stock owned of record by Stratford Equity Partners, L.P. ("Stratford
    Equity"); or (iii) the 50,844 shares of Holdings Common Stock isssuable at
    any time upon conversion of all such shares of Holdings Preferred Stock.
    Mr. Farmer, a director of the Company, is a managing director and an
    officer of Stratford Capital Corporation, the general partner of Stratford
    Capital G.P. Associates, L.P., which is the general partner of each of
    Stratford Capital and Stratford Equity. Mr. Farmer disclaims beneficial
    ownership of all such shares of Holdings Common Stock and Holdings
    Preferred Stock, except to the extent of his pecuniary interest therein.
 
                                      40
<PAGE>
 
(5)  Does not include (i) 14,096 shares of Holdings Common Stock, 37,940 shares
     of Holdings Series C Preferred Stock or 10,480 shares of Holdings Series D
     Preferred Stock, owned of record by Hoak Communications Partners, L.P.
     ("Hoak Communications"); (ii) 1,212 shares of Holdings Common Stock, 3,262
     shares of Holdings Series C Preferred Stock or 862 shares of Holdings
     Series D Preferred Stock owned of record by HCP Capital Fund, L.P. (the
     "HCP Capital Fund"); or (iii) the 52,544 shares of Holdings Common Stock
     issuable at the time upon conversion of all such shares of Holdings
     Preferred Stock. Mr. Harrison, a director of the Company, shares voting
     and investment power over Hoak Partners, LLC, the general partner of HCP
     Investment, LP, which is the general partner of Hoak Communications and
     shares voting and investment power at James M. Hoak & Co., which is the
     general partner of HCP Capital Fund. Mr. Harrison disclaims beneficial
     ownership of all such shares, except to the extent of his pecuniary
     interest therein.
(6)  Does not include (i) 72,528 of Holdings Common Stock, 156,057 shares of
     Holdings Series B Preferred Stock, 41,909 shares of Holdings Series C
     Preferred Stock or 45,749 shares of Holdings Series D Preferred Stock or
     (ii) the 243,715 shares of Holdings Common Stock issuable at any time upon
     conversion of all such shares of Holdings Preferred Stock. All such shares
     of Holdings Common Stock and Holdings Preferred Stock are owned of record
     by BGFVF. Mr. Mendell, a director of the Company, shares voting and
     investment power at Focus Value GP, Inc., the general partner of Beacon
     Focus Value Investors, LLC, which is the general partner of BGFVF. Mr.
     Mendell disclaims beneficial ownership of all such shares, except to the
     extent of his pecuniary interest therein.
(7)  Includes 71 shares of Holdings Common Stock issuable at any time upon
     conversion of the same number of shares of Holdings Series B Preferred
     Stock owned of record by Mr. Mendell.
(8)  Does not include (i) 72,528 shares of Holdings Common Stock, 156,057
     shares of Holdings Series B Preferred Stock, 41,909 shares of Holdings
     Series C Preferred Stock or 45,749 shares of Holdings Series D Preferred
     Stock, or (ii) the 243,715 shares of Holdings Common Stock issuable at any
     time upon conversion of all such shares of Holdings Preferred Stock. All
     such shares of Holdings Common Stock and Holdings Preferred Stock are
     owned of record by BGFVF. Mr. Wilkinson, a director of the Company, shares
     voting and investment power at Focus Value GP, Inc., the general partner
     of Beacon Focus Value Investors, LLC, which is the general partner of
     BGFVF. Mr. Wilkinson disclaims beneficial ownership of all such shares,
     except to the extent of his pecuniary interest therein.
(9)  Does not include (i) 72,528 shares of Holdings Commons Stock, 156,057
     share of Holdings Series B Preferred Stock, 41,909 shares of Holdings
     Series C Preferred Stock or 45,749 shares of Holdings Series D Preferred
     Stock or (ii) the 243,715 shares of Holdings Common Stock issuable at any
     time upon conversion of all such shares of Holdings Preferred Stock. All
     such shares of Holdings Common Stock and Holdings Preferred Stock are
     owned of record by BGFVF. Mr. Pote, a director of the Company, shares
     voting and investment power at Focus Value GP, Inc., the general partner
     of Beacon Focus Value Investors, LLC, which is the general partner of
     BGFVF. Mr. Pote disclaims beneficial ownership of all such shares, except
     to the extent of his pecuniary interest therein.
(10) Includes 1,460 shares of Holdings Common Stock subject to employee stock
     options that are currently exercisable and does not include the 2,191
     shares of Holdings Common Stock subject to employee stock options that
     are not currently exercisable.
(11) Includes 2,921 shares of Holdings Common Stock subject to employee stock
     options that are currently exercisable and does not include the 4,382
     shares of Holdings Common Stock that are not currently exercisable.
(12) Focus Value GP, Inc. is the general partner of Beacon Focus Value
     Investors, LLC, which is the general partner of BGFVF. Mr. Mendell, Mr.
     Wilkinson and Mr. Pote, each a director of the Company, are managing
     directors of Focus Value GP, Inc.
(13) Does not include (i) 809 shares of Holdings Common Stock or (ii) 71
     shares of Holdings Common Stock issuable upon conversion of the same
     number of shares of Holdings Series B Preferred Stock, all of which
     shares are owned of record by Mr. Mendell, an affiliate of BGFVF, as to
     which BGFVFdoes not have any voting or investment power. Includes 243,715
     shares of Holdings Common Stock issuable at any time upon conversion of
     shares of Holdings Series B Preferred Stock, Holdings Series C Preferred
     Stock and Holdings Series D Preferred Stock, all of which Shares are
     owned of record by BGFVF.
 
                                      41
<PAGE>
 
(14) Does not include 71 shares of Holdings Series B Preferred Stock owned of
     record by Mr. Mendell, an affiliate of BGFVF, as to which BGFVF does not
     have any voting or investment power.
(15) Hoak Partners, LLC is the general partner of HCP Investment, LP, which is
     the general partner of Hoak Communications. Mr. Harrison, a director of
     the Company, shares voting and investment power at Hoak Partners, LLC.
(16) Includes 48,420 shares of Holdings Common Stock issuable at any time upon
     conversion of 37,940 shares of Holdings C Preferred Stock and 10,257
     shares of Holdings Series D Preferred Stock owned of record by Hoak
     Communications.
(17) James M. Hoak & Co. is the general partner of HCP Capital Fund. Mr.
     Harrison, a director of the Company, is a director and officer of James
     M. Hoak & Co.
(18) Includes 4,124 shares of Holdings Common Stock issuable at any time upon
     conversion of 3,262 shares of Holdings Series C Preferred Stock and 862
     shares of Holdings Series D Preferred Stock owned of record by HCP
     Capital Fund.
(19) Stratford Capital Corporation is the general partner of Stratford GP
     Associates, LP, which is the general partner of each of Stratford Equity
     and Stratford Capital. Mr. Farmer, a director of the Company, is a
     managing director and an officer of Stratford Capital Corporation.
(20) Includes (i) 39,405 shares of Holdings Common Stock issuable at any time
     upon conversion of 31,012 shares of Holdings Series B Preferred Stock and
     the 8,393 shares of Holdings Series C Preferred Stock owned of record by
     Stratford Capital and (ii) 11,345 shares of Holdings Common Stock
     issuable at any time upon conversion of 11,439 shares of Holdings Series
     D Preferred Stock owned of record by Stratford Equity.
(21) Includes 31,012 shares of Holdings Series B Preferred Stock owned of
     record by Stratford Capital.
(22) Includes 8,393 shares of Holdings Series C Preferred Stock owned of
     record by Stratford Capital.
(23) Includes 11,439 shares of Holdings Series D Preferred Stock owned of
     record by Stratford Equity.
(24) Includes 132 shares and 71 shares of Holdings Common Stock that Thomas W.
     Stephenson, Jr. and Thomas G. Mendell, respectively, have a right to
     acquire at any time by converting the same number of shares of Holdings
     Series B Preferred Stock owned by each of them, respectively. Also
     includes 5,842, 1,460 and 2,920 shares of Holdings Commons Stock that Mr.
     Stephenson, James R. Featherstone and Robert E. Painter, respectively,
     have a right to acquire at any time by exercising outstanding employee
     stock options.
 
Item 13. Certain Relationships and Related Transactions
 
Engagement of The Beacon Group Capital Services, LLC
 
  Holdings has entered into an agreement with The Beacon Group Capital
Services, LLC ("Beacon Group Capital Services") pursuant to which Beacon Group
Capital Services has the right to perform certain investment banking services
for Holdings or any of its affiliates (including, without limitation, in
connection with the sale of Holdings of any of its subsidiaries), in each
case, upon customary terms. As of December 31, 1998, Holdings has not been
required to pay any funds to Beacon Group Capital Services. More specifically,
in July 1998, the Company engaged Beacon Group Capital Services as the
Company's sole and exclusive financial advisor for the purpose of identifying
opportunities for a business combination transaction. Under the terms of the
agreement, Beacon Group Capital Services is entitled to a $1.5 million fee in
connection with its role in the Recapitalization Transactions. However, Beacon
Group Capital Services has agreed to waive any payments owing thereto by
Holdings and to terminate the agreement in connection with the
Recapitalization Transactions if such Recapitalization Transactions are
consummated outside of and prior to any bankruptcy proceeding of the Company
or Holdings.
 
Construction Arrangement with Precept Investors, Inc.
 
  Precept Investors, Inc. ("Precept"), one of Holding's shareholders, has been
engaged by Holdings to construct various theaters. During 1998, Precept was
involved in the construction of two theaters and improvements to one existing
theater, and was paid approximately $11.9 million for these services. During
1997,
 
                                      42
<PAGE>
 
Precept was involved in the construction of two theaters and improvements to
three existing theaters, and was paid approximately $14.5 million for these
services. At December 31, 1998, approximately $2.7 million was owed to Precept
and is included in accounts payable and accrued expenses in the accompanying
consolidated balance sheet. No amounts were owed to Precept as of December 31,
1997.
 
Indemnification Agreement of Thomas W. Stephenson
 
  Thomas W. Stephenson has entered into an indemnification agreement with the
Company and Holdings in connection with certain personal guarantees made by
Mr. Stephenson for obligations of the Company under certain agreements,
including, but not limited to theater leases and film rental agreements and
other similar agreements that Mr. Stephenson may be required to guarantee in
the future. Pursuant to such indemnification agreement, the Company and
Holdings have agreed to indemnify Mr. Stephenson against any and all payments,
liabilities, obligations, claims, losses, damages, commitments, costs,
deficiencies, expenses paid or incurred by Mr. Stephenson under any Stephenson
Guarantee and against any and all expenses (including attorneys' fees), costs,
liabilities and obligations paid or incurred in connection with or as a result
of such payments under the Stephenson Guarantees.
 
Agreements with BGFVF Relating to Financing
 
  BGFVF is the principal stockholder of Holdings. Thomas E. Mendell, Harold W.
Pote and Eric R. Wilkinson are each partners of The Beacon Group, L.L.C., an
affiliate of BGFVF. During 1998 and the first quarter of 1999, the Company and
Holdings entered into several arrangements with BGFVF, its principal
stockholder, to induce BGFVF to take certain actions required by the Lenders
under the Senior Bank Facility. In August 1998, the Company required funds
under the Senior Bank Facility at a time when the Company did not meet certain
financial conditions for additional borrowings thereunder. To induce the
Lenders to waive the financial conditions for a limited time and to allow the
Company to borrow additional amounts under the Senior Bank Facility, BGFVF
agreed to deliver for the benefit of the Lenders a letter of credit for $12.5
million to support the full amount of the additional borrowings by the Company
at that time. To induce BGFVF to issue the letter of credit, Holdings and
BGFVF entered into the August Contingent Reimbursement Agreement pursuant to
which Holdings agreed that if the Lenders ever called upon BGFVF's letter of
credit, Holdings would be required to reimburse BGFVF by issuing to BGFVF
shares of Holdings preferred stock.
 
  In November 1998, Bank of America agreed to provide the Company with $5.0
million of short-term capital under the Interim Facility, separate from the
Senior Bank Facility, to allow the Company to issue new equity and debt
securities on or before December 15, 1998 (which was subsequently extended
through January 14, 1999). Bank of America required that all amounts borrowed
under the Interim Facility be guaranteed by BGFVF. The purpose of the Interim
Facility was to provide short-term capital to the Company prior to the
completion of a proposed (but never completed) transaction involving the
issuance of equity and debt by the Company, the refinancing of the Senior Bank
Facility and the exchange of the Notes. To induce BGFVF to guarantee such
borrowings, the Company, Holdings and BGFVF entered into the November
Contingent Reimbursement Agreement pursuant to which, if BGFVF was ever
required to fund any amount under the guarantee, Hollywood would be required
to reimburse BGFVF by issuing to BGFVF senior subordinated debt and Holdings
would be required to issue to BGFVF shares of a new series of senior
convertible preferred stock.
 
  In January 1999, the Company required additional borrowings under the Senior
Bank Facility to continue operations, but again did not meet certain
applicable borrowing conditions. The Company was unable to borrow the
additional funds it required from its bank lenders. On January 14, 1999, with
the financial backing of BGFVF, the Company received a waiver of certain
financial covenants under the Senior Bank Facility until June 30, 1999 and the
Senior Bank Facility was amended to increase the loan commitment thereunder
from $50.0 million to $75.0 million and to permit affiliates of the Company to
participate in any loans made thereunder. In connection with obtaining such
waivers and amending the Senior Bank Facility, BGFVF entered into a
Participation Agreement with the Lenders, pursuant to which BGFVF purchased a
$12.5 million junior participation in loans previously funded under the Senior
Bank Facility (and theretofore backed by BGFVF's $12.5 million letter of
 
                                      43
<PAGE>
 
credit) and agreed to fund additional borrowings by the Company under the
Senior Bank Facility, if any. All of the institutional investors of Holdings
were offered the opportunity to become party to the Participation Agreement,
but only BGFVF elected to do so. All future loans under the Senior Bank
Facility were made contingent on BGFVF's agreement, in each case, to fund such
borrowings pursuant to the Participation Agreement. At that time, (i) BGFVF
committed, subject to certain conditions, to fund at least $4.0 million of
additional borrowings thereunder for the Company's working capital needs; (ii)
the final maturity of the Senior Bank Facility was moved from August 7, 2002
to June 30, 1999; (iii) the Company borrowed approximately $5.0 million under
the Senior Bank Facility to repay all principal and interest under and to
terminate the Interim Facility; and (iv) the Lenders extinguished the $12.5
million letter of credit and Interim Facility guarantee previously supplied by
BGFVF. In addition, effective as of January 27, 1999, the August Contingent
Reimbursement Agreement and the November Contingent Reimbursement Agreement
were terminated.
 
  At March 30, 1999, the Company had approximately $72.4 million of
indebtedness outstanding (which includes a letter of credit of $189,000) under
the Senior Bank Facility, of which (i) approximately $37.5 million was funded
by the Lenders and (ii) approximately $34.9 million was funded by BGFVF
through the Participation Agreement. Pursuant to the terms of the
Participation Agreement, amounts repaid under the Senior Bank Facility will be
applied first to pay in full all Nonparticipation Obligations, and second to
pay in full all Participation Obligations. As a lender under the Participation
Agreement, BGFVF receives interest at the applicable margin under the Senior
Bank Facility with respect to amounts borrowed thereunder.
 
  To date, BGFVF has funded its participation in the Senior Bank Facility
through a loan of $34.9 million provided by Bank of America to BGFVF (the
"Participation Loan"). BGFVF may borrow up to $37.5 million to purchase
participations in the Senior Bank Facility. In the event that all or any
portion of the Participation Loan is called or accelerated by Bank of America,
the Company is obligated to issue a senior unsecured note (the "Participation
Note") to BGFVF, as the sole institutional investor of Holdings electing to
enter into the Participation Agreement, in the principal amount of up to
$5.0 million, as permitted by the Senior Bank Facility. The actual principal
amount of the Participation Note would be determined pro rata, based on the
actual amount of borrowings called or accelerated under the Participation
Loan, and the Participation Note would rank pari passu in right of payment to
the Senior Bank Facility. If the Recapitalization Transactions are
consummated, the Company does not expect to issue the Participation Note.
 
                                      44
<PAGE>
 
                                    PART IV
 
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
 
Item 14(a)(1) Financial Statements:
 
<TABLE>
<CAPTION>
                                                                           Page
   Included in this Report:                                                No.
   ------------------------                                                ----
   <S>                                                                     <C>
   Report of Independent Public Accountants..............................  F-2
 
   Consolidated Balance Sheets as of December 31, 1998 and 1997..........  F-3
 
   Consolidated Statements of Operations for the Years Ended December 31,
    1998, 1997, and 1996.................................................  F-4
 
   Consolidated Statements of Stockholders' Equity (Deficit) for the
    Years Ended December 31, 1998, 1997, and 1996........................  F-5
 
   Consolidated Statements of Cash Flows for the Years Ended December 31,
    1998, 1997, and 1996.................................................  F-6
 
   Notes to Consolidated Financial Statements............................  F-7
</TABLE>
 
    (2) Financial Statement Schedule: Not applicable
 
    (3) Exhibits required by Item 601 of Regulation S-K are as follows:
 
<TABLE>
<CAPTION>
   Exhibit
   Number                               Description
   -------                              -----------
   <C>     <S>
     2.1   Agreement and Plan of Merger, dated as of March 3, 1999, by and
           among Hollywood Theater Holdings, Inc., Hollywood Merger Co.,
           Wallace Theater Corporation II, The Beacon Group III-Focus Value
           Fund, L.P., Stratford Capital Partners, L.P., Stratford Equity
           Partners, L.P., Hoak Communications Partners, L.P. and HCP Capital
           Fund, L.P. (filed as Exhibit 10.23 hereto)
 
    *3.1   Amended and Restated Certificate of Incorporation of Hollywood
           Theaters, Inc.
 
    *3.2   Restated Certificate of Incorporation of Hollywood Theater Holdings,
           Inc.
 
    *3.3   Articles of Incorporation of Crown Theatre Corporation
 
    *3.4   By-laws of Hollywood Theaters, Inc.
 
    *3.5   By-laws of Hollywood Theater Holdings, Inc.
 
    *3.6   By-laws of Crown Theatre Corporation
 
    *4.1   Indenture dated as of August 7, 1997 among Hollywood Theaters, Inc.,
           Hollywood Theater Holdings, Inc. and Crown Theatre Corporation and
           U.S. Trust Company of Texas, N.A.
 
    *4.2   Exchange and Registration Rights Agreement, dated as of August 7,
           1997 among Hollywood Theaters, Inc., Hollywood Theater Holdings,
           Inc., Goldman, Sachs, & Co., and BancAmerica Securities Inc.
 
    *4.3   Second Amendment to Registration Rights Agreement, dated as of
           December 17, 1997 by and between Hollywood Theater Holdings, Inc.
           and The Beacon Group III--Focus Value Fund, L.P., as amended
 
    *4.4   Second Amendment to Registration Rights Agreement, dated as of
           December 17, 1997, by and among Hollywood Theater Holdings, Inc.,
           Stratford Capital Partners, L.P. and Precept Investors, Inc.
 
    *4.5   Registration Rights Agreement, dated as of November 1, 1996, by and
           between Hollywood Theater Holdings, Inc. and Richard M. Durwood
           Revocable Trust
 
</TABLE>
 
                                       45
<PAGE>
 
<TABLE>
<CAPTION>
   Exhibit
   Number                               Description
   -------                              -----------
   <C>     <S>
    *4.6   First Amendment to Registration Rights Agreement, dated as of
           December 17, 1997, by and among Hollywood Theater Holdings, Inc.,
           Hoak Communications Partners, L.P., HCP Capital Fund, L.P. and HCP
           1997 Authorized Employee Fund
 
    *4.7   Amended and Restated Agreement with respect to Registration Rights,
           dated as of May 13, 1997, by and among Hollywood Theater Holdings,
           Inc., Stratford Capital Partners, L.P., Precept Investors, Inc., The
           Beacon Group III--Focus Value Fund, L.P., Hoak Communications
           Partners, L.P., HCP Capital Fund, L.P. and HCP 1997 Authorized
           Employee Fund, L.P.
 
   *10.1   Amended and Restated Credit Agreement, dated as of August 7, 1997,
           among Hollywood Theater Holdings, Inc., Hollywood Theaters, Inc.,
           and Bank of America National Trust and Savings Associations
 
   *10.2   Amended and Restated Shareholders' and Voting Agreement, dated as of
           December 17, 1997, by and among Hollywood Theater Holdings, Inc.,
           The Beacon Group III--Focus Value Fund, L.P., Stratford Capital
           Partners, L.P., Hoak Communications Partners, L.P., HCP Capital
           Fund, L.P., and HCP 1997 Authorized Employee Fund, L.P.
 
   *10.3   Purchase and Assignment Agreement, dated as of July 25, 1997,
           between General Cinema Corp. of Oklahoma, Inc. and Hollywood
           Theaters, Inc., as amended by Amendment No. 1 to Purchase and
           Assignment Agreement, dated as of July 30, 1997, between General
           Cinema Corp. of Oklahoma, Inc. and Hollywood Theaters, Inc.
 
   *10.4   Agreement of Purchase and Sale, dated as of July 22, 1996, by and
           among United Artists Theatre Circuit, Inc., United Artists
           Properties I Corp., Resort Amusement Corporation and Hollywood
           Theaters, Inc. as amended
 
   *10.5   Asset and Stock Purchase Agreement, dated as of August 26, 1996,
           between Crown Cinema Corporation, Crown Theatre Corporation,
           Hollywood Theaters, Inc., and Hollywood Theater Holdings, Inc., as
           amended
 
   *10.6   Asset Purchase Agreement, dated as of August 19, 1997, between
           Dickinson, Inc. and Hollywood Theaters, Inc.
 
   *10.7   Employment Agreement, dated as of October 1, 1996, between Hollywood
           Theaters, Inc. and Thomas W. Stephenson, Jr.
 
   *10.8   Employment Agreement, dated as of October 1, 1996, between Hollywood
           Theaters, Inc. and James R. Featherstone
 
   *10.9   Employment Agreement, dated as of October 1, 1996, between Hollywood
           Theaters, Inc. and Robert E. Painter
 
   *10.10  Hollywood Theaters, Inc. Savings and Profit Sharing Plan, as amended
           and restated
 
   *10.11  Hollywood Theater Holdings, Inc. 1996 Stock Option and Award Plan,
           dated December 15, 1996, as amended
 
   *10.12  Hollywood Theaters, Inc. 401(k) Savings Plan, as amended
 
   *10.13  Indemnification Agreement, dated as of May 15, 1996, by and between
           Hollywood Theaters, Inc., Hollywood Theater Holdings, Inc., and
           Thomas W. Stephenson, Jr.
 
   *10.14  Third Amendment to Amended and Restated Credit Agreement, dated
           January 7, 1998, among Hollywood Theater Holdings, Inc., Hollywood
           Theaters, Inc., and Bank of America National Trust and Savings
           Association
 
</TABLE>
 
                                       46
<PAGE>
 
<TABLE>
<CAPTION>
   Exhibit
   Number                               Description
   -------                              -----------
   <C>     <S>
    10.15  Fourth Amendment and Waiver to Amended and Restated Credit
           Agreement, dated May 22, 1998, among Hollywood Theater Holdings,
           Inc., Hollywood Theaters, Inc., and Bank of America National Trust
           and Savings Association
 
    10.16  Fifth Amendment and Waiver to Amended and Restated Credit Agreement,
           dated August 14, 1998, among Hollywood Theater Holdings, Inc.,
           Hollywood Theaters, Inc., and Bank of America National Trust and
           Savings Association
 
    10.17  Sixth Amendment and Waiver to Amended and Restated Credit Agreement,
           dated October 1998, among Hollywood Theater Holdings, Inc.,
           Hollywood Theaters, Inc. and Bank of America National Trust and
           Savings Association
 
    10.18  Seventh Amendment and Waiver to Amended and Restated Credit
           Agreement, dated December 15, 1998, among Hollywood Theater
           Holdings, Inc., Hollywood Theaters, Inc. and Bank of America
           National Trust and Savings Association
 
    10.19  Eighth Amendment and Waiver to Amended and Restated Credit
           Agreement, dated December 21, 1998, among Hollywood Theater
           Holdings, Inc., Hollywood Theaters, Inc. and Bank of America
           National Trust and Savings Association
 
    10.20  Ninth Amendment and Waiver to Amended and Restated Credit Agreement,
           dated January 8, 1999, among Hollywood Theater Holdings, Inc.,
           Hollywood Theaters, Inc. and Bank of America National Trust and
           Savings Association
 
    10.21  Tenth Amendment and Waiver to Amended and Restated Credit Agreement,
           dated January 14, 1999, among Hollywood Theater Holdings, Inc.,
           Hollywood Theaters, Inc. and Bank of America National Trust and
           Savings Association
 
    10.22  Forbearance Agreement and Eleventh Amendment to Amended and Restated
           Credit Agreement, dated February 1, 1999, among Hollywood Theater
           Holdings, Inc., Hollywood Theaters, Inc. and Bank of America
           National Trust and Savings Association
 
    10.23  Agreement and Plan of Merger, dated as of March 3, 1999, by and
           among Hollywood Theater Holdings, Inc., Hollywood Merger Co.,
           Wallace Theater Corporation II, The Beacon Group III--Focus Value
           Fund, L.P., Stratford Capital Partners, L.P., Stratford Equity
           Partners, L.P., Hoak Communications Partners, L.P. and HCP Capital
           Fund, L.P.
 
    10.24  Forbearance Agreement and Twelfth Amendment to Amended and Restated
           Credit Agreement, dated March 4, 1999, among Hollywood Theater
           Holdings, Inc., Hollywood Theaters, Inc. and Bank of America
           National Trust and Savings Association
    10.25  Thirteenth Amendment to Amended and Restated Credit Agreement, dated
           March 17, 1999, among Hollywood Theater Holdings, Inc., Hollywood
           Theaters, Inc. and Bank of America National Trust and Savings
           Association
    10.26  Engagement Letter, dated July 29, 1998, between Hollywood Theaters,
           Inc. and the Beacon Group Capital Services, LLC
    21.1   Subsidiaries of the Registrants
 
    27.1   Financial Data Schedule (for SEC use only)
 
</TABLE>
--------
* Incorporated by reference to Hollywood Theaters, Inc.'s Registration
  Statement on Form S-4 (File No. 333-36763), dated February 4, 1998
 
                                       47
<PAGE>
 
 
Item 14(b) Reports on Form 8-K
 
  The registrants filed a Current Report on Form 8-K, dated March 3, 1999, to
report pursuant to Item 5 that the Company had agreed to a recapitalization
sponsored by GTCR Fund VI, L.P., an investment fund managed by GTCR Golder
Rauner. As part of such recapitalization, Holdings will merge with a
subsidiary of Wallace Theater Corporation II and consequently become a wholly-
owned subsidiary of Wallace Corporation II. The Current Report contained no
financial statements.
 
                                      48
<PAGE>
 
<TABLE>
<CAPTION>
                                                                          Page
Financial Statements                                                      No.
--------------------                                                      ----
<S>                                                                       <C>
Report of Independent Public Accountants................................. F-2
 
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-3
 
Consolidated Statements of Operations for the Years Ended December 31,
 1998, 1997, and 1996.................................................... F-4
 
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
 Ended December 31, 1998, 1997, and 1996................................. F-5
 
Consolidated Statements of Cash Flows for the Years Ended December 31,
 1998, 1997, and 1996.................................................... F-6
 
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
 
                                      F-1
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Stockholders of
Hollywood Theater Holdings, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Hollywood
Theater Holdings, Inc. (a Delaware corporation) and subsidiary as of December
31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
 
  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, the financial statements referred to above present fairly,
in all material respects, the financial position of Hollywood Theater
Holdings, Inc. and subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
 
  The accompanying 1998 financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company recorded a net loss of approximately $71.2
million in 1998. In addition, the Company is currently in default on its 10
5/8% senior subordinated notes and its revolving credit facility is due in
1999. The Company does not currently have adequate liquidity or available
sources of financing to meet its contractual debt obligations. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The 1998 financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result should the Company
be unable to continue as a going concern.
 
                                          Arthur Andersen LLP
 
Dallas, Texas,
 March 30, 1999
 
                                      F-2
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
                          CONSOLIDATED BALANCE SHEETS
                           December 31, 1998 and 1997
                      (In Thousands Except Share Amounts)
 
<TABLE>
<CAPTION>
                                                              1998      1997
                                                            --------  --------
<S>                                                         <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents................................ $  5,713  $  7,379
  Accounts receivable......................................    1,066     1,562
  Inventories..............................................    1,158     1,012
  Prepaid and other current assets, net....................    1,108       850
  Deposits.................................................    1,049     1,593
                                                            --------  --------
    Total current assets...................................   10,094    12,396
  Property and equipment, net..............................  143,437   104,376
  Goodwill, net............................................   16,232    49,215
  Intangible assets, net...................................   11,421    14,289
  Other....................................................    3,640     3,744
                                                            --------  --------
    Total assets........................................... $184,824  $184,020
                                                            ========  ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable and other accrued expenses.............. $ 22,370  $  5,930
  Accrued interest payable.................................    4,934     4,675
  Current maturities of long-term debt.....................  164,800       --
  Current maturities of capital lease obligation...........       64       --
  Deferred revenue.........................................      245       158
                                                            --------  --------
    Total current liabilities..............................  192,413    10,763
Other liabilities:
  Long-term debt...........................................      --    110,000
  Capital lease obligation, net of current maturities......      258       --
  Deferred lease expenses..................................    1,517     1,158
  Deferred revenue.........................................      --        302
                                                            --------  --------
    Total liabilities......................................  194,188   122,223
Commitments and contingencies
Convertible redeemable preferred stock:
  Series B Preferred Stock, $.01 par value, 400,000 shares
   authorized, 194,022 and 178,028 shares issued and
   outstanding in 1998 and 1997, respectively (redemption
   preference of $33,954 and $31,155 as of December 31,
   1998 and 1997, respectively)............................        2         2
  Series C Preferred Stock, $.01 par value, 400,000 shares
   authorized, 91,712 and 84,137 shares issued and
   outstanding in 1998 and 1997, respectively (redemption
   preference of $17,884 and $16,407 as of December 31,
   1998 and 1997, respectively)............................        1         1
  Series D Preferred Stock, $.01 par value, 400,000 shares
   authorized, 68,629 and 61,826 shares issued and
   outstanding in 1998 and 1997, respectively (redemption
   preference of $13,383 and $12,054 as of December 31,
   1998 and 1997, respectively)............................        1         1
  Additional paid-in capital...............................   65,215    59,610
Redeemable common stock:
  Common stock, 16,413 shares issued and outstanding in
   1998 and 1997...........................................      --        --
  Additional paid-in capital...............................    2,872     2,872
Stockholders' deficit:
  Common stock, $.01 par value, 1,500,000 shares
   authorized, 103,659 and 103,464 shares issued and
   outstanding in 1998 and 1997, respectively..............        1         1
  Additional paid-in capital...............................   15,552    15,508
  Accumulated deficit......................................  (93,008)  (16,198)
                                                            --------  --------
    Total stockholders' deficit............................  (77,455)     (689)
                                                            --------  --------
    Total liabilities and stockholders' deficit............ $184,824  $184,020
                                                            ========  ========
</TABLE>
 
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
 
                                      F-3
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
             For the Years Ended December 31, 1998, 1997, and 1996
                                 (In Thousands)
 
<TABLE>
<CAPTION>
                                                      1998     1997     1996
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Revenues:
  Admissions....................................... $ 64,726  $50,616  $15,335
  Concessions......................................   35,257   26,712    8,710
  Other operating revenues.........................    1,911    1,843      834
                                                    --------  -------  -------
    Total revenues.................................  101,894   79,171   24,879
                                                    --------  -------  -------
Operating expenses:
  Film rental and advertising costs................   37,665   27,576    8,388
  Cost of concessions..............................    6,592    4,320    1,412
  Theater operating expenses.......................   40,434   31,180   10,998
  General and administrative expenses..............    7,528    5,077    1,601
  Depreciation and amortization....................   18,309   11,479    3,152
  Impairment of long-lived assets..................   48,083      --       --
                                                    --------  -------  -------
    Total operating expenses.......................  158,611   79,632   25,551
                                                    --------  -------  -------
Operating loss.....................................  (56,717)    (461)    (672)
Interest expense, net..............................   14,475    7,485    2,121
                                                    --------  -------  -------
Net loss........................................... $(71,192) $(7,946) $(2,793)
                                                    ========  =======  =======
</TABLE>
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-4
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
             For the Years Ended December 31, 1998, 1997, and 1996
                      (In Thousands, Except Share Amounts)
 
<TABLE>
<CAPTION>
                              Series A Preferred Stock         Common Stock
                              ---------------------------   ------------------ Additional
                                  Shares                      Shares            Paid-In   Accumulated
                               Outstanding      Amount      Outstanding Amount  Capital     Deficit    Total
                              --------------   ----------   ----------- ------ ---------- ----------- --------
<S>                           <C>              <C>          <C>         <C>    <C>        <C>         <C>
Balance, December 31, 1995..            5,090   $      --      22,622    $--    $  2,745   $   (907)  $  1,838
  Issuance of stock.........           85,000            1     77,168       1     20,501        --      20,503
  Retirement of stock.......          (90,090)          (1)   (30,173)    --     (14,137)       --     (14,138)
  Retirement of warrant.....              --           --         --      --        (200)      (141)      (341)
  Stock dividend............              --           --         --      --         --        (422)      (422)
  Cash dividend.............              --           --         --      --         --        (355)      (355)
  Net loss..................              --           --         --      --         --      (2,793)    (2,793)
                                -------------   ----------    -------    ----   --------   --------   --------
Balance, December 31, 1996..              --           --      69,617       1      8,909     (4,618)     4,292
  Issuance of stock.........              --           --      33,847     --       6,599        --       6,599
  Stock dividend............              --           --         --      --         --      (3,634)    (3,634)
  Net loss..................              --           --         --      --         --      (7,946)    (7,946)
                                -------------   ----------    -------    ----   --------   --------   --------
Balance, December 31, 1997..              --           --     103,464       1     15,508    (16,198)      (689)
  Issuance of stock.........              --           --         499     --          97        --          97
  Retirement of stock.......              --           --        (304)    --         (53)        (7)       (60)
  Stock dividend............              --           --         --      --         --      (5,611)    (5,611)
  Net loss..................              --           --         --      --         --     (71,192)   (71,192)
                                -------------   ----------    -------    ----   --------   --------   --------
Balance, December 31, 1998..              --    $      --     103,659    $  1   $ 15,552   $(93,008)  $(77,455)
                                =============   ==========    =======    ====   ========   ========   ========
</TABLE>
 
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-5
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             For the Years Ended December 31, 1998, 1997, and 1996
                                 (In Thousands)
 
<TABLE>
<CAPTION>
                                                    1998      1997      1996
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Cash flows from operating activities:
  Net loss....................................... $(71,192) $ (7,946) $ (2,793)
  Adjustments to reconcile net loss to net cash
   provided by operating activities--
   Depreciation and amortization.................   18,309    11,479     3,152
   Impairment of long-lived assets...............   48,083       --        --
   Deferred lease expenses.......................      483       500       545
   Changes in assets and liabilities--
    Decrease (increase) in accounts receivable...      496      (559)     (951)
    (Increase) decrease in prepaids and other
     current assets, net.........................     (836)      125      (963)
    Increase in inventories......................     (346)     (450)     (316)
    Increase in other assets.....................      --     (3,744)      --
    Decrease (increase) in deposits..............      519       805    (1,544)
    Increase (decrease) in accounts payable and
     other accrued expenses......................   14,528       (77)    3,902
    Increase in accrued interest payable.........      259     4,675       --
    (Decrease) increase in deferred revenue......     (215)      460       --
                                                  --------  --------  --------
     Net cash provided by operating activities...   10,088     5,268     1,032
                                                  --------  --------  --------
Cash flows from investing activities:
  Purchases of property and equipment............  (67,167)  (66,361)  (10,734)
  Sale/disposition of property and equipment.....      831    12,895       --
  Payments for business acquisitions, net of cash
   acquired......................................      --    (36,649)  (58,986)
                                                  --------  --------  --------
     Net cash used in investing activities.......  (66,336)  (90,115)  (69,720)
                                                  --------  --------  --------
Cash flows from financing activities:
  Proceeds from issuance of senior subordinated
   notes.........................................      --    110,000       --
  Borrowings under note payable..................    5,000     3,800       --
  Borrowings under revolving credit facility.....   49,800    14,000    58,428
  Payment of financing fees......................     (474)   (5,284)   (3,718)
  Increase (decrease) of capital lease
   obligation....................................      322       (32)      (44)
  Repayments of note payable and long-term debt..      --    (68,437)  (16,691)
  Proceeds from issuance of stock................      --     34,620    48,659
  Repurchase of common and preferred stock.......      (66)      --    (14,138)
  Retirement of warrants.........................      --        --       (341)
  Dividends paid.................................      --        --       (355)
                                                  --------  --------  --------
     Net cash provided by financing activities...   54,582    88,667    71,800
                                                  --------  --------  --------
Net (decrease) increase in cash and cash
 equivalents.....................................   (1,666)    3,820     3,112
Cash and cash equivalents, beginning of year.....    7,379     3,559       447
                                                  --------  --------  --------
Cash and cash equivalents, end of year........... $  5,713  $  7,379  $  3,559
                                                  ========  ========  ========
Supplemental information:
  Cash paid for interest......................... $ 14,216  $  3,051  $  2,089
                                                  ========  ========  ========
Noncash transactions:
  Stock dividend................................. $  5,611  $  3,634  $    422
                                                  ========  ========  ========
  Issuance of stock in connection with business
   acquisitions.................................. $    --   $    620  $  2,253
                                                  ========  ========  ========
  Issuance of stock for compensation............. $     97  $    --   $    --
                                                  ========  ========  ========
  Purchase price adjustments..................... $  2,009  $    --   $    --
                                                  ========  ========  ========
  Obsolete inventory adjustments................. $    200  $    --   $    --
                                                  ========  ========  ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-6
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       December 31, 1998, 1997, and 1996
 
1. Organization and Current Operating Environment
 
  Hollywood Theater Holdings, Inc. ("Holdings") and its wholly owned
subsidiary, Hollywood Theaters, Inc., ("HTI") both Delaware corporations, were
formed in June 1995 to purchase all of the outstanding shares of Trans Texas
Amusements, Inc. and affiliates. Crown Theatre Corporation became a wholly
owned subsidiary of HTI after it was acquired by Holdings on November 1, 1996,
the effective date of the purchase. Holdings, HTI, and Crown Theatre
Corporation (collectively the "Company") owned and operated 72 motion picture
theaters (including stadium, first run, and discount theaters) at December 31,
1998. The Company currently operates theaters in Alabama, Idaho, Kansas,
Missouri, Ohio, Oklahoma, and Texas.
 
  The accompanying 1998 financial statements have been prepared assuming that
the Company will continue as a going concern. The Company recorded a net loss
of approximately $71.2 million in 1998. In addition, the Company is currently
in default on its 10 5/8% senior subordinated notes due 2007 (the "Senior
Subordinated Notes") and its revolving credit facility is due in 1999 (see
Note 6). The Company does not currently have adequate liquidity or available
sources of financing to meet its contractual debt obligations. These factors
raise substantial doubt about the Company's ability to continue as a going
concern.
 
  In March 1999, Holdings entered into a recapitalization agreement (the
"Recapitalization") with an unaffiliated entity. As part of the
Recapitalization, Holdings will merge and become a wholly owned subsidiary of
an unaffiliated entity. HTI will continue as a wholly owned subsidiary of
Holdings. Also, in March 1999, in connection with the Recapitalization, and as
a condition thereto, HTI commenced an offer to purchase the $110.0 million
principal amount outstanding of its Senior Subordinated Notes and a related
solicitation of consents to proposed amendments to the indenture governing the
Senior Subordinated Notes. The offer and related consent expire on April 2,
1999, unless extended by the Company. The proposed amendments would permit the
Recapitalization and related financing transactions and provide the Company
with significant operational flexibility following the Recapitalization. In
addition to consummation of the offer and consent solicitation, the
Recapitalization is subject to a number of conditions, many of which are
beyond the control of the Company. Accordingly, there is no guarantee that the
Recapitalization and merger will be consummated. If the Company is not able to
consummate the Recapitalization for any reason, the Company may not have
sufficient resources, and may not have access to sufficient resources, to
satisfy its obligations under the revolving credit facility or the Senior
Subordinated Notes. Accordingly, there is a substantial prospect that Holdings
and HTI would be required to seek protection under the U.S. Bankruptcy Code.
 
  The accompanying 1998 financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
 
2. Significant Accounting Policies
 
 Principles of Consolidation and Presentation
 
  The consolidated financial statements include the accounts of Holdings, and
its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
 
 Cash and Cash Equivalents
 
  Cash and cash equivalents consist of operating funds held in financial
institutions and petty cash held at the theaters. The Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
 
                                      F-7
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
 
 Accounts Receivable
 
  Accounts receivable are due primarily from vendors and film companies for
reimbursable vendor promotion costs and film advertising costs. Film
advertising reimbursements are generally credited against the film rental and
advertising costs.
 
 Inventories
 
  Inventories are stated at the lower of cost (first-in, first-out) or market
and consist primarily of concession products and theater supplies.
 
 Prepaid and Other Current Assets
 
  Prepaid and other current assets consist of prepaid insurance, prepaid rent
and theater start-up costs. Theater start-up costs are amortized over a one
year period.
 
 Deposits
 
  Deposits consist of funds held in escrow in accordance with certain purchase
agreements, utility and lease deposits, and other deposits required for
construction projects.
 
 Property and Equipment
 
  Property and equipment are stated at cost. Depreciation of furniture and
equipment and buildings is provided using the straight-line method over an
eight-year period and thirty-year period, respectively. Leasehold improvements
are amortized using the straight-line method over the lesser of the lease
period or the estimated useful lives of the leasehold improvements.
 
  Property and equipment are reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. When the carrying value of property and equipment exceeds the sum
of all estimated future theater cash flows, an impairment loss is recognized
based on estimated fair value (see Note 4).
 
 Goodwill
 
  Goodwill is recorded as the excess of cost over fair value of assets
acquired and is amortized over 15 years. Accumulated amortization of goodwill
was approximately $2.9 million and $4.0 million at December 31, 1998 and 1997,
respectively.
 
  The Company periodically reviews the carrying value of goodwill on a
theater-by-theater basis to determine if facts and circumstances exist which
would suggest the goodwill may be impaired or that the amortization period
needs to be modified. If impairment is indicated, an adjustment is made to
reduce the carrying amount of the goodwill to its estimated fair value (see
Note 4).
 
 Intangible Assets
 
  Intangible assets include deferred financing costs which are amortized over
the life of the related liability and covenants not-to-compete which are
amortized using the straight-line method over a five year period.
 
 Other Assets
 
  Other assets includes prepaid rent applicable to future periods for one
stadium theater.
 
 Deferred Lease Expenses
 
  Rent expense is recognized on a straight-line basis after considering the
effect of rent escalation provisions.
 
 Income Taxes
 
  Deferred tax assets and liabilities are based upon estimated future tax
effects of the differences in the tax bases of existing assets and liabilities
and the related financial statement carrying amounts, using currently enacted
tax laws and rates.
 
                                      F-8
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
 
 Revenues
 
  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.
 
 Advertising
 
  Advertising costs are expensed when incurred.
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Accounting Standards Adopted
 
  During 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 requires a public business enterprise to report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. The Company analyzes the performance of and allocates
resources to each theater individually. Accordingly, under the aggregation
provisions of SFAS 131, the Company has determined that it operates one line
of business.
 
 Reclassifications
 
  Certain reclassifications have been made to the prior year statements to
conform them to the current year presentation.
 
3. Property and Equipment
 
  Property and equipment at December 31, 1998 and 1997, consisted of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                             --------  --------
   <S>                                                       <C>       <C>
   Buildings................................................ $ 47,190  $ 44,024
   Furniture and equipment..................................   32,380    33,564
   Leasehold improvements...................................   41,103    19,316
   Land.....................................................   11,915    10,487
   Construction in progress.................................   20,246     3,172
                                                             --------  --------
                                                              152,834   110,563
   Less-Accumulated depreciation and amortization...........   (9,397)   (6,187)
                                                             --------  --------
                                                             $143,437  $104,376
                                                             ========  ========
</TABLE>
 
  A significant portion of the Company's property and equipment transactions
during 1998 and 1997 related to additions to the Company's stadium theaters.
 
                                      F-9
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
 
4. Impairment of Long-Lived Assets
 
  The Company periodically reviews theater performance and competition within
its markets for indicators of impairment of individual theaters. The Company
considers a trend of current and anticipated operating cash flow results to be
its primary indicator of potential impairment. The Company deems a theater to
be impaired if a forecast of undiscounted theater operating cash flows is less
than the carrying amount of its total property and equipment and related
goodwill. If a theater is determined to be impaired, the loss is measured by
the amount which the total carrying amount of the theater exceeds its
estimated fair value.
 
  During 1998, the Company continued to refine its business plan in response
to competitive and market conditions. During this period, the Company also
explored various financing options to carry out its business plans. During the
fourth quarter of 1998, the Company had no firm financing commitments to
complete the stadium building program of its business plan. It determined
during this time that the financial performance of certain theaters had
deteriorated, or was likely to deteriorate in the near term as a result of
competitive pressures. As a result, in the fourth quarter of 1998, the Company
recorded noncash charges for impairment of property and equipment and related
goodwill of approximately $16.9 million and approximately $31.2 million,
respectively. The impairment related to certain of its first-run and discount
theaters. No such adjustments were required in 1997 and 1996.
 
5. Intangible Assets
 
  Intangible assets at December 31, 1998 and 1997, consisted of the following
(in thousands):
 
<TABLE>
<CAPTION>
                                                                1998     1997
                                                               -------  -------
   <S>                                                         <C>      <C>
   Covenants not-to-compete................................... $ 8,307  $ 8,307
   Deferred finance and other costs...........................  10,432    9,958
                                                               -------  -------
                                                                18,739   18,265
   Less- Accumulated amortization.............................  (7,318)  (3,976)
                                                               -------  -------
                                                               $11,421  $14,289
                                                               =======  =======
</TABLE>
 
6. Long-Term Debt
 
  Long-term debt at December 31, 1998 and 1997, consisted of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                              1998     1997
                                                            -------- --------
   <S>                                                      <C>      <C>
   Revolving credit facility, interest at LIBOR plus 2.75%
    or the base rate plus 1.75% (weighted average of 8.63%
    at December 31, 1998) due 1999......................... $ 49,800 $    --
   Bank note payable, interest at the base rate plus 0.75%
    (8.5% at December 31, 1998); due January 1999..........    5,000      --
   Senior Subordinated Notes, interest at 10.625% payable
    on February 1 and August 1, due 2007 (currently in
    default)...............................................  110,000  110,000
                                                            -------- --------
   Total long-term debt....................................  164,800  110,000
   Less current maturities.................................  164,800      --
                                                            -------- --------
   Long-term debt, net..................................... $    --  $110,000
                                                            ======== ========
</TABLE>
 
 Senior Subordinated Notes
 
  In August 1997, HTI completed an offering of $110.0 million of the Senior
Subordinated Notes. The Senior Subordinated Notes bear interest payable semi-
annually in February and August at 10 5/8% and are due in
 
                                     F-10
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
2007. The Senior Subordinated Notes are redeemable at HTI's option and upon
the occurrence of certain events in the future. The Senior Subordinated Notes
also include restrictive covenants relative to the incurrence of additional
indebtedness. HTI used the net proceeds from the offering to repay all of the
then existing indebtedness under its credit facility, to finance certain
acquisitions, to fund a portion of construction and other expenses related to
the 1997 theater building program, and for general corporate purposes.
Holdings and Crown Theatre Corporation are guarantors of the Senior
Subordinated Notes.
 
  The Company did not make its required interest payment of approximately $5.8
million due on February 1, 1999, or at the end of the 30-day grace period, on
the Senior Subordinated Notes. As a result, at March 26, 1999, HTI is
currently in default on the Senior Subordinated Notes. However, at March 26,
1999, the acceleration provisions under the indenture have not been exercised
by the noteholders. The interest payment and the balance of the Senior
Subordinated Notes have been classified as current liabilities in the
consolidated balance sheets as of December 31, 1998.
 
 Revolving Credit Facility
 
  In conjunction with the offering described above, HTI amended its credit
facility. The revolving credit facility provided for a revolving line of
credit of $50.0 million with a five-year term. HTI had the right at any time
prior to June 30, 1999, to solicit on predetermined terms and conditions an
increase in the revolving credit facility to an amount not to exceed $75.0
million. The agreement stipulated that total borrowings are not to exceed 5.5
times of HTI's "trailing" twelve-month cash flow and certain other
restrictions.
 
  In January 1999, HTI amended its revolving credit facility (the
"Amendment"). The terms of the Amendment provide for, among other things, an
expansion of the credit facility to $75.0 million subject to certain
conditions of borrowing, a waiver of compliance by HTI of all financial
covenants until June 30, 1999, and an acceleration of maturity of amounts
outstanding under the credit facility from August 7, 2002, to June 30, 1999.
The Amendment also provides for the inclusion of the $5.0 million bank note
payable into the expanded credit facility. At March 30, 1999, the balance of
the revolving credit facility was approximately $72.4 million (which includes
a letter of credit of $189,000 (see Note 15)). Because HTI failed to make its
interest payment on the Senior Subordinated Notes, an event of default
occurred under the revolving credit facility. Through a series of forbearance
agreements between HTI and the lenders dated February and March, 1999, the
lenders have waived the event of default until the earlier of the
Recapitalization or April 30, 1999 or termination of such forbearance
agreements in accordance with their terms. Although the lenders have entered
into the forbearance agreements, the lenders are still permitted to deliver a
"blockage notice" to the trustee of the Senior Subordinated Notes, prohibiting
the payment of any principal of or interest on, or in respect of the purchase
or other acquisition of, or defeasance of, the Senior Subordinated Notes.
 
  A majority stockholder had issued a letter of credit and had guaranteed
certain portions of the Company's revolving credit facility at December 31,
1998 (see Note 16).
 
 Deferred Financing Costs
 
  At December 31, 1998, the Company has unamortized debt issuance costs
related to the Senior Subordinated Notes and revolving credit facility of
approximately $7.0 million. Such costs are being amortized over the original
terms of the related debt. The unamortized portion will be recognized as an
additional charge to earnings at the dates the Senior Subordinated Notes and
revolving credit facility are paid or otherwise settled.
 
7. Leases
 
  The Company leases certain of its theater premises with lease terms of four
to 20 years. Additionally, certain leases provide for contingent rentals based
on operating results and require the payment of taxes, insurance, and
 
                                     F-11
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
other costs applicable to the property. The Company, at its option, may renew
a substantial portion of the leases at defined or then fair rental rates for
various periods. Some leases also provide for escalating rent payments
throughout the lease term. A deferred lease expense accrual of approximately
$1.5 million and $1.2 million in 1998 and 1997, respectively, has been
provided to account for these leases on a straight-line basis. Rent expense
for the years ended December 31, 1998, 1997 and 1996, totaled approximately
$10.9 million, $9.3 million, and $3.0 million, respectively, and is included
in theater operating expenses on the accompanying consolidated statements of
operations.
 
  Future minimum payments under noncancelable leases with initial or remaining
terms in excess of one year at December 31, 1998, are due as follows (in
thousands):
 
<TABLE>
   <S>                                                                  <C>
   1999................................................................ $ 11,774
   2000................................................................   11,518
   2001................................................................   10,291
   2002................................................................    9,418
   2003................................................................    8,989
   Thereafter..........................................................   67,891
                                                                        --------
                                                                        $119,881
                                                                        ========
</TABLE>
 
8. Income Taxes
 
  As of December 31, 1998, the Company has a net operating loss (NOL)
carryforward of approximately $29.0 million for tax reporting purposes, which
begins to expire in calendar year 2010. In October 1996, the Company underwent
an ownership change pursuant to Internal Revenue Code Section 382. As a
result, the NOL carryforward to future years will be limited. Due to the lack
of an earnings history, the tax benefits normally associated with this NOL
carryforward and other tax assets have been fully resolved in the accompanying
consolidated financial statements. Accordingly, the Company recorded no income
tax expense or benefit for any of the years presented.
 
  The Company's net deferred income taxes at December 31, 1998 and 1997,
consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                1998     1997
                                                              --------  -------
   <S>                                                        <C>       <C>
   Amortization.............................................. $    969  $   538
   Deferred lease expenses...................................      551      376
   Deferred revenue..........................................       94      156
   Accrued vacation and bonuses..............................       94      154
   Charitable contributions..................................       17      --
   Net operating loss carryforward...........................    9,869    3,005
   Depreciation..............................................       (8)    (341)
   Impairment of long-lived assets...........................   16,343      --
                                                              --------  -------
     Total deferred income tax assets........................   27,929    3,888
   Less--Valuation allowance.................................  (27,929)  (3,888)
                                                              --------  -------
     Net deferred income tax assets.......................... $    --   $   --
                                                              ========  =======
</TABLE>
 
  The difference between the statutory federal income tax rate of 34% and the
effective federal income tax rate of 0% is due to unrecognized current year
benefit.
 
                                     F-12
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
 
9. Fair Value of Financial Instruments
 
  Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires all entities to disclose the
estimated fair value of its financial instrument assets and liabilities. Cash
and cash equivalents, accounts receivable, and accounts payable and accrued
liabilities are reflected in the consolidated financial statements at fair
value because of the short-term maturity of these instruments. Because of the
financial position of the Company at December 31, 1998, as discussed in Note
1, and the lack of trading of the Senior Subordinated Notes, the Company
cannot reasonably estimate fair market value of its debt at December 31, 1998.
However, in the tender offer and consent solicitation discussed in Note 1, the
Company has offered to pay consideration of 70% of the Senior Subordinated
Notes. At December 31, 1997, the Company's long-term debt was determined to
approximate its carrying value since it was issued at fair market value during
1997.
 
10. Convertible Redeemable Preferred Stock and Common Stock
 
  In November 1996, The Beacon Group III--Focus Value Fund, L.P. ("BGFVF")
purchased approximately $19.0 million of a new class of Series B Convertible
Redeemable Preferred Stock ("Series B Preferred Stock"). The Series B
Preferred Stock is redeemable after the seventh anniversary of the issue date
by the holders, as long as a qualifying initial public offering of the common
stock has not occurred. The preferred shares are automatically converted into
common stock, upon completion of a qualifying initial public offering. The
Series B Preferred Stock is convertible, initially on a one-for-one basis,
subject to adjustment to reflect specified antidilution events, including
without limitation, stock splits, stock combinations, certain issuances of
equity and certain business combination transactions. The holders of Series B
Preferred Stock are entitled to dividends at an annual rate of 9%. The Board
of Directors may elect to pay dividends in shares of Series B Preferred Stock.
The liquidation preference of each share of Series B Preferred Stock is the
greater of $175 plus accrued but unpaid dividends or the per share amount the
holder would have received upon liquidation on a converted basis plus accrued
but unpaid dividends. In addition, the Company exchanged Series A Preferred
Stock held by BGFVF, Precept Investors, Inc. ("Precept"), Stratford Capital
Partners L.P., and Stratford Equity Partners, L.P. (collectively "Stratford")
for the newly authorized Series B Preferred Stock at a ratio of 1.75/1.00
shares.
 
  In 1997 and 1996, a total of 16,413 shares were issued to Richard M. Durwood
and the Richard M. Durwood Revocable Trust ("RMD Trust") for $2.9 million in
connection with the acquisition of Crown Theater Corporation. In addition, at
any time on or after October 31, 2001, provided that an offering of the
Company's common stock has not then occurred, Richard M. Durwood, and/or the
RMD Trust may require the Company to repurchase not less than all of the
shares of the Company's Common Stock held by each at the fair market value at
the time of repurchase.
 
  In April 1997, the Board of Directors approved 400,000 shares of $.01 par
value Series C Convertible Redeemable Preferred Stock ("Series C Preferred
Stock"). The Series C Preferred Stock is redeemable under the same conditions
and requirements as Series B Preferred Stock. The holders of Series C
Preferred Stock are entitled to dividends at an annual rate of 9%. The Board
of Directors may elect to pay dividends in shares of Series C Preferred Stock.
The liquidation preference of each share of Series C Preferred Stock is the
greater of $195 plus accrued but unpaid dividends or the per share amount the
holder would have received upon liquidation on a converted basis plus accrued
but unpaid dividends. The Company issued 43,076 shares of Series C Preferred
Stock to BGFVF and Stratford for approximately $8.4 million.
 
  In May 1997, the Company issued 35,897 shares of Series C Preferred Stock
for approximately $7.0 million to Hoak Communications Funds (the "Hoak
Entities").
 
  In November 1997, the Company issued 51,283 shares of Series C Preferred
Stock for approximately $10.0 million to BGFVF and Stratford Equity Partners,
L.P.
 
                                     F-13
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
 
  In December 1997, the Board of Directors approved 400,000 shares of $.01 par
value Series D Convertible Redeemable Preferred Stock ("Series D Preferred
Stock"). The Series D Preferred Stock is redeemable under the same conditions
and requirements as Series B Preferred Stock. The holders of Series D
Preferred Stock are entitled to dividends at an annual rate of 11%. The Board
of Directors may elect to pay dividends in shares of Series D Preferred Stock.
The liquidation preference of each share of Series D Preferred Stock is the
greater of $195 plus accrued but unpaid dividends or the per share amount the
holder would have received upon liquidation on a converted basis plus accrued
but unpaid dividends. Additionally, the Company sold 10,257 shares of Series D
Preferred Stock for approximately $2.0 million to the Hoak Entities and
exchanged 51,283 of Series C Preferred Stock for Series D Preferred Stock at a
ratio of 1/1.
 
  The Board of Directors authorized a 9% preferred stock dividend of Series B
Preferred Stock on December 15, 1996, to the stockholders of record of Series
B Preferred Stock on December 15, 1996. The stock dividend was paid on
December 31, 1996. The Board of Directors also authorized a 9% preferred stock
dividend of Series B and C Preferred Stock and an 11% preferred stock divided
of Series D Preferred Stock on December 31, 1997, to the stockholders of
record of Series B and D Preferred Stock on December 18, 1997, and Series C
Preferred Stock on December 19, 1997. The stock dividend was paid on December
31, 1997. The Company also recorded a similar stock dividend at December 31,
1998.
 
11. Stockholders' Equity (Deficit)
 
  In April 1996, the Company issued 50,000 shares of Series A Preferred Stock
($.01 par value) to Precept and Stratford for proceeds of $5.0 million. In
addition, in October and November 1996, BGFVF purchased 35,000 shares of
Series A Preferred Stock for $3.5 million and approximately $2.5 million of
common stock.
 
  In connection with the issuance of Series B Preferred Stock in November
1996, the Company offered to purchase the outstanding common stock from
existing stockholders for $170 per share. Shareholders sold 30,173 shares to
the Company for a total cost of approximately $5.0 million.
 
  In April 1997, the Company issued 18,462 shares of common stock to BGFVF and
Stratford for approximately $3.6 million.
 
  In May 1997, the Company issued 15,385 shares of common stock to Hoak for
approximately $3.0 million.
 
  The Company has an incentive stock plan to provide for the granting of
options to its employees at prices not less than market at the date of grant.
At December 31, 1998, the Company had allocated 37,000 shares of stock for
issuance under the plan. The plan provides that options granted are
exercisable after one year from date of grant at a rate of 20% each year
cumulatively during the 10-year term of the option. An analysis of stock
option activity for the years ended December 31, 1998, 1997, and 1996, is
presented in the table and narrative below:
 
<TABLE>
<CAPTION>
                                  1998             1997             1996
                            ---------------- ---------------- ----------------
                                   Wtd. Avg.        Wtd. Avg.        Wtd. Avg.
                            Shares Ex. Price Shares Ex. Price Shares Ex. Price
                            ------ --------- ------ --------- ------ ---------
<S>                         <C>    <C>       <C>    <C>       <C>    <C>
Outstanding, beginning of
 year...................... 25,556   $175    25,556   $175       --    $--
Granted.................... 11,368    195       --     --     25,556    175
Exercised..................    --     --        --     --        --     --
Canceled...................    --     --        --     --        --     --
                            ------   ----    ------   ----    ------   ----
Outstanding, end of year... 36,924   $181    25,556   $175    25,556   $175
                            ======   ====    ======   ====    ======   ====
Exercisable at end of
 year...................... 10,222   $175     5,111   $175       --    $--
                            ======   ====    ======   ====    ======   ====
</TABLE>
 
                                     F-14
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
 
  The options outstanding at December 31, 1998, have exercise prices between
$175 and $195 with a weighted average exercise price of $181 and a weighted
average remaining contractual life of 8.2 years.
 
  The Company accounts for this plan under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized for options granted. Had compensation
cost for the plan been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss would have increased by the amounts shown in the table
below on a pro forma basis for the years ended December 31, 1998, 1997 and
1996. The fair value of the options were calculated using risk-free interest
rates of 5.88% and 6.86%, respectively, for the 1998 and 1996 grants and an
expected dividend yield of 0%, from which a minimum value was obtained.
 
<TABLE>
<CAPTION>
                                                       1998     1997     1996
                                                     --------  -------  -------
   <S>                                               <C>       <C>      <C>
   Net loss
     As reported.................................... $(71,192) $(7,946) $(2,793)
     Pro forma......................................  (71,636)  (8,057)  (2,793)
</TABLE>
 
                                     F-15
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
12. Condensed Consolidating Financial Statements
 
  The following are condensed consolidating financial statements of the
Company. These statements are presented to provide financial information with
respect to HTI, the issuer of the Senior Subordinated Notes and borrower under
the revolving line of credit.
 
  At December 31, 1998, Holdings owns a 100% interest in HTI. These condensed
consolidating financial statements present Holdings' investment in its
subsidiary using the equity method. Under this method, investments are
recorded at cost and adjusted for the parent company's ownership share of the
subsidiary's cumulative results of operations. In addition, investments
increase by the amount of contributions to the subsidiary and decrease in the
amount of distributions from the subsidiary.
 
Condensed Consolidating Balance Sheets (In Thousands):
 
<TABLE>
<CAPTION>
                                                    Consolidating   Company
    As of December 31, 1998     Holdings    HTI        Entries    Consolidated
    -----------------------     --------  --------  ------------- ------------
<S>                             <C>       <C>       <C>           <C>
Assets:
  Cash and cash equivalents.... $    --   $  5,713    $    --       $  5,713
  Other current assets, net ...      --      4,381         --          4,381
                                --------  --------    --------      --------
  Total current assets.........      --     10,094         --         10,094
  Property and equipment, net..      --    143,437         --        143,437
  Investment in subsidiary.....   (9,364)      --        9,364           --
  Other noncurrent assets,
   net.........................      --     31,293         --         31,293
                                --------  --------    --------      --------
                                $ (9,364) $184,824    $  9,364      $184,824
                                ========  ========    ========      ========
Liabilities and stockholders'
 deficit:
  Current liabilities.......... $    --   $192,413    $    --       $192,413
  Other noncurrent
   liabilities.................      --      1,775         --          1,775
  Redeemable convertible
   preferred stock.............   65,219       --          --         65,219
  Redeemable common stock......    2,872       --          --          2,872
  Stockholders' deficit........  (77,455)   (9,364)      9,364       (77,455)
                                --------  --------    --------      --------
                                $ (9,364) $184,824    $  9,364      $184,824
                                ========  ========    ========      ========
<CAPTION>
                                                    Consolidating   Company
    As of December 31, 1997     Holdings    HTI        Entries    Consolidated
    -----------------------     --------  --------  ------------- ------------
<S>                             <C>       <C>       <C>           <C>
Assets:
  Cash and cash equivalents.... $    --   $  7,379    $    --       $  7,379
  Other current assets, net....      --      5,017         --          5,017
                                --------  --------    --------      --------
  Total current assets.........      --     12,396         --         12,396
  Property and equipment, net..      --    104,376         --        104,376
  Investment in subsidiary.....   61,797       --      (61,797)          --
  Other noncurrent assets,
   net.........................      --     67,248         --         67,248
                                --------  --------    --------      --------
                                $ 61,797  $184,020    $(61,797)     $184,020
                                ========  ========    ========      ========
Liabilities and stockholders'
 equity (deficit):
  Current liabilities.......... $    --   $ 10,763    $    --       $ 10,763
  Long-term debt...............      --    110,000         --        110,000
  Other noncurrent
   liabilities.................      --      1,460         --          1,460
  Redeemable convertible
   preferred stock.............   59,614       --          --         59,614
  Redeemable common stock......    2,872       --          --          2,872
  Stockholders' equity
   (deficit)...................     (689)   61,797     (61,797)         (689)
                                --------  --------    --------      --------
                                $ 61,797  $184,020    $(61,797)     $184,020
                                ========  ========    ========      ========
</TABLE>
 
                                     F-16
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
Condensed Consolidating Statements of Operations (In Thousands):
 
<TABLE>
<CAPTION>
For the Year Ended December 31,                      Consolidating   Company
             1998                Holdings    HTI        Entries    Consolidated
-------------------------------  --------  --------  ------------- ------------
<S>                              <C>       <C>       <C>           <C>
Revenues.......................  $    --   $101,894     $   --       $101,894
                                 --------  --------     -------      --------
Operating expenses:
  Direct theater costs.........       --     84,691         --         84,691
  General and administrative...       --      7,528         --          7,528
  Depreciation and
   amortization................       --     18,309         --         18,309
  Impairment of long-lived
   assets......................       --     48,083         --         48,083
                                 --------  --------     -------      --------
                                      --    158,611         --        158,611
                                 --------  --------     -------      --------
Operating loss.................       --    (56,717)        --        (56,717)
                                 --------  --------     -------      --------
Interest expense, net..........       --     14,475         --         14,475
                                 --------  --------     -------      --------
Equity in loss of subsidiary...   (71,192)      --       71,192           --
                                 --------  --------     -------      --------
Net loss.......................  $(71,192) $(71,192)    $71,192      $(71,192)
                                 ========  ========     =======      ========
<CAPTION>
For the Year Ended December 31,                      Consolidating   Company
             1997                Holdings    HTI        Entries    Consolidated
-------------------------------  --------  --------  ------------- ------------
<S>                              <C>       <C>       <C>           <C>
Revenues.......................  $    --   $ 79,171     $   --       $ 79,171
                                 --------  --------     -------      --------
Operating expenses:
  Direct theater costs.........       --     63,076         --         63,076
  General and administrative...       --      5,077         --          5,077
  Depreciation and
   amortization................       --     11,479         --         11,479
                                 --------  --------     -------      --------
                                      --     79,632         --         79,632
                                 --------  --------     -------      --------
Operating loss.................       --       (461)        --           (461)
                                 --------  --------     -------      --------
Interest expense, net..........       --      7,485         --          7,485
                                 --------  --------     -------      --------
Equity in loss of subsidiary...    (7,946)      --        7,946           --
                                 --------  --------     -------      --------
Net loss.......................  $ (7,946) $ (7,946)    $ 7,946      $ (7,946)
                                 ========  ========     =======      ========
<CAPTION>
For the Year Ended December 31,                      Consolidating   Company
             1996                Holdings    HTI        Entries    Consolidated
-------------------------------  --------  --------  ------------- ------------
<S>                              <C>       <C>       <C>           <C>
Revenues.......................  $     --  $ 24,879     $   --       $ 24,879
                                 --------  --------     -------      --------
Operating expenses:
  Direct theater costs.........       --     20,798         --         20,798
  General and administrative...       --      1,601         --          1,601
  Depreciation and
   amortization................       --      3,152         --          3,152
                                 --------  --------     -------      --------
                                      --     25,551         --         25,551
                                 --------  --------     -------      --------
Operating loss.................       --       (672)        --           (672)
                                 --------  --------     -------      --------
Interest expense, net..........       --      2,121         --          2,121
                                 --------  --------     -------      --------
Equity in loss of subsidiary...    (2,793)      --        2,793           --
                                 --------  --------     -------      --------
Net loss.......................  $ (2,793) $ (2,793)    $ 2,793      $ (2,793)
                                 ========  ========     =======      ========
</TABLE>
 
                                      F-17
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
Condensed Consolidating Statements of Cash Flows (In Thousands):
 
<TABLE>
<CAPTION>
       For the Year Ended                            Consolidating   Company
       December 31, 1998         Holdings    HTI        Entries    Consolidated
       ------------------        --------  --------  ------------- ------------
<S>                              <C>       <C>       <C>           <C>
Operating....................... $    --   $ 10,306    $    --       $ 10,306
                                 --------  --------    --------      --------
Investing:
  Purchases of property and
   equipment....................      --    (69,610)        --        (69,610)
  Sale/disposition of property
   and equipment................      --      3,056         --          3,056
                                 --------  --------    --------      --------
                                      --    (66,554)        --        (66,554)
                                 --------  --------    --------      --------
Financing:
  Borrowings under note payable
   and long-term debt...........      --     54,800         --         54,800
  Other.........................      --       (218)        --           (218)
                                 --------  --------    --------      --------
                                      --     54,582         --         54,582
                                 --------  --------    --------      --------
Net decrease in cash............ $    --   $ (1,666)   $    --       $ (1,666)
                                 ========  ========    ========      ========
<CAPTION>
       For the Year Ended                            Consolidating   Company
       December 31, 1997         Holdings    HTI        Entries    Consolidated
       ------------------        --------  --------  ------------- ------------
<S>                              <C>       <C>       <C>           <C>
Operating....................... $    --   $  5,268    $    --       $  5,268
                                 --------  --------    --------      --------
Investing:
  Purchases of property and
   equipment....................      --    (66,361)        --        (66,361)
  Sale/disposition of property
   and equipment................      --     12,895         --         12,895
  Payments for business
   acquisitions, net of cash
   acquired.....................      --    (36,649)        --        (36,649)
  Contributions to subsidiary...  (34,620)      --       34,620           --
                                 --------  --------    --------      --------
                                  (34,620)  (90,115)     34,620       (90,115)
                                 --------  --------    --------      --------
Financing:
  Borrowings under note payable
   and long-term debt...........      --    127,800         --        127,800
  Repayments of note payable and
   long-term debt...............      --    (68,437)                  (68,437)
  Proceeds from issuance of
   stock........................   34,620    34,620     (34,620)       34,620
  Other.........................      --     (5,316)        --         (5,316)
                                 --------  --------    --------      --------
                                   34,620    88,667     (34,620)       88,667
                                 --------  --------    --------      --------
Net increase in cash............ $    --   $  3,820    $    --       $  3,820
                                 ========  ========    ========      ========
</TABLE>
 
                                      F-18
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
<TABLE>
<CAPTION>
 For the Year Ended December 31,                       Consolidating   Company
               1996                Holdings    HTI        Entries    Consolidated
 -------------------------------   --------  --------  ------------- ------------
 <S>                               <C>       <C>       <C>           <C>
 Operating.......................  $    --   $  1,032    $    --       $  1,032
                                   --------  --------    --------      --------
 Investing:
   Purchases of property and
    equipment....................       --    (10,734)        --        (10,734)
   Payments for business
    acquisitions, net of cash
    acquired.....................       --    (58,986)        --        (58,986)
   Contributions to subsidiary...   (48,659)      --       48,659           --
                                   --------  --------    --------      --------
                                    (48,659)  (69,720)     48,659       (69,720)
                                   --------  --------    --------      --------
 Financing:
   Borrowings under note payable
    and long-term debt...........       --     58,428         --         58,428
   Repayments of note payable and
    long-term debt...............       --    (16,691)                  (16,691)
   Proceeds from issuance of
    stock........................    48,659    48,659     (48,659)       48,659
   Other.........................       --    (18,596)        --        (18,596)
                                   --------  --------    --------      --------
                                     48,659    71,800     (48,659)       71,800
                                   --------  --------    --------      --------
 Net increase in cash............  $    --   $  3,112    $    --       $  3,112
                                   ========  ========    ========      ========
</TABLE>
 
13. Retirement Savings Plan
 
  The Company has a 401(k) profit sharing plan for the benefit of all eligible
employees and makes contributions as determined annually by the Board of
Directors. The Company made no contributions in 1998, 1997 or 1996.
 
14. Acquisitions
 
 1997 Acquisitions
 
  In May 1997, the Company completed the acquisition of two theaters with an
aggregate of 12 screens in Beaumont and Port Arthur, Texas, from United
Artists Theatre Circuit Inc. for a cash purchase price of approximately $3.4
million.
 
  In June 1997, the Company completed the acquisition of two theaters with an
aggregate of 14 screens in Killeen, Texas, from Escape Theaters, Inc. for a
cash purchase price of approximately $8.5 million.
 
  In August 1997, the Company completed the acquisition of seven theaters with
an aggregate of 50 screens in Oklahoma City and Tulsa, Oklahoma, from General
Cinema Corp. for a cash purchase price of approximately $15.8 million.
 
  In September 1997, the Company completed the acquisition of a newly
constructed 16-screen theater in Waco, Texas, for approximately $8.9 million.
Additionally, the Company purchased furniture, fixtures and equipment for this
theater for approximately $2.7 million.
 
  In October 1997, the Company completed the exchange of six theaters with an
aggregate of 31 screens operated by HTI in Kansas and Missouri for five
theaters with an aggregate of 22 screens owned by Dickinson, Inc. in the same
states. The Company also received cash of approximately $1.1 million in
connection with the exchange. The Company recorded no gain or loss on the
exchange. The Company also completed the acquisition of one theater with six
screens in Tomball, Texas, from Cineco Cinema Corporation for a cash purchase
price of approximately $1.8 million.
 
                                     F-19
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
 
 1996 Acquisitions
 
  In April 1996, the Company acquired, for approximately $3.3 million in cash,
six theaters in Texas from Cinemore, Inc. and related entities.
 
  In August 1996, the Company acquired, for approximately $1.8 million in
cash, two theaters in Texas from Beaumont Cinema Ventures, L.P.
 
  In November 1996, the Company acquired 33 theaters primarily in Kansas,
Missouri, and Ohio from Crown Cinema Corporation and Crown Theatre
Corporation. The Company issued 16,413 shares of its common stock to the
seller, at a fair market value of approximately $2.9 million, and paid cash of
approximately $41.1 million to the seller for these acquisitions. The former
stakeholder of Crown Cinema Corporation is now a stockholder and consultant of
the Company. The Company also acquired, for $700,000 in cash, two theaters in
Texas from General Cinema Corp. of Texas.
 
  In November and December 1996, the Company acquired, for approximately $11.3
million in cash, 19 theaters in Idaho, Oklahoma, and Texas from United Artists
Theatre Circuit Inc. and related entities.
 
  The 1997 and 1996 acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to the
assets acquired (including all identifiable intangible assets, if material)
based upon their estimated fair values at the dates of acquisition in
accordance with APB No. 16. The results of operations of the acquired theaters
are included in the consolidated financial statements from the respective
dates of acquisition. None of the acquisition agreements contain any
significant earn-out provisions with the sellers.
 
  The following is a summary of the net assets acquired and liabilities
assumed in connection with the foregoing acquisitions in 1997 and 1996 (in
thousands). All such acquisitions were accounted for under the purchase
method.
 
<TABLE>
<CAPTION>
                                                                 1997    1996
                                                                ------- -------
<S>                                                             <C>     <C>
Assets acquired:
  Cash and cash equivalents.................................... $ 1,102 $    56
  Inventories..................................................     115     130
  Prepaid and other current assets.............................      37     442
                                                                ------- -------
    Total current assets.......................................   1,254     628
  Buildings....................................................   3,854  10,964
  Furniture and equipment......................................   6,123   9,011
  Leasehold improvements.......................................   2,240   6,123
  Land.........................................................   1,100   2,990
  Land improvements............................................     --      436
  Construction-in-progress.....................................     --      117
  Covenants not-to-compete.....................................   1,208   6,099
                                                                ------- -------
    Total other assets.........................................  14,525  35,740
                                                                ------- -------
    Total assets acquired......................................  15,779  36,368
                                                                ------- -------
Liabilities assumed:
  Accounts payable.............................................     101     --
                                                                ------- -------
    Total liabilities assumed..................................     101     --
                                                                ------- -------
    Net assets acquired........................................  15,678  36,368
Purchase price, including acquisition costs....................  33,315  61,073
                                                                ------- -------
Goodwill....................................................... $17,637 $24,705
                                                                ======= =======
</TABLE>
 
 
                                     F-20
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
 Pro Forma Information
 
  The following unaudited pro forma information reflects the effect on the
consolidated statements of operations assuming that significant acquisitions
were consummated as of January 1, 1997 and 1996. This information may not be
indicative of the results that would have actually been obtained if the
acquisitions had occurred on such dates. Therefore, pro forma information
cannot be considered indicative of future operations. The unaudited pro forma
information for the years ended December 31, 1997 and 1996, is as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                            1997        1996
                                                         ----------- -----------
                                                         (Unaudited) (Unaudited)
   <S>                                                   <C>         <C>
   Total revenues.......................................   $90,090     $78,710
   Net loss.............................................   (10,373)     (4,323)
</TABLE>
 
15. Commitments and Contingencies
 
  At December 31, 1998, the Company had a letter of credit outstanding of
$189,000 with a bank related to a sales and use tax bond in one of the states
in which it operates.
 
  The Company is not party to, nor are any of the Company's theaters the
subject of, any material pending legal proceedings, other than ordinary,
routine litigation incidental to the Company's business, except for the
following:
 
  On June 24, 1998, in an action in the United States District Court, Eastern
District of Texas, Beaumont Division, Civil Action No. 1:98-CV-1975, Todd
Freeland, for himself and those similarly situated, v. Hollywood Theaters,
Inc., a private plaintiff is alleging that HTI has violated the Americans with
Disabilities Act of 1990, as amended (the "ADA") and Chapter 12 of the Texas
Human Resources Code (a state statute similar to the ADA) for not providing
comparable seating for wheelchair patrons at one of HTI's multiplex theaters
located in Beaumont, Texas. The suit seeks an unspecified amount of actual and
statutory damages in an amount of $1,000 for each violation, a declaratory
judgment and an injunction requiring HTI to modify the wheelchair seating
arrangements at the theater to provide views comparable to those afforded to
the general public. HTI has filed an answer denying allegations in the
Freeland suit. Although HTI believes that the wheelchair seating provided in
the Beaumont theater complies with applicable ADA standards, the proper
interpretation of those standards as they relate to theaters with stadium-
style seating is the subject of several ongoing lawsuits within the industry
and remains to be clearly established. Accordingly, HTI may be required to
modify its handicapped seating arrangements in the Beaumont facility.
 
  Management is of the opinion that the eventual outcome of these matters will
not have a material adverse effect on the Company's financial position or
results of operations.
 
16. Related-Party Transactions
 
  Precept, one of the Company's shareholders, has been engaged by the Company
to construct various theaters. During 1998, Precept was involved in the
construction of two theaters and improvements to one existing theater, and was
paid approximately $11.9 million for these services. During 1997, Precept was
involved in the construction of two theaters and improvements to three
existing theaters, and was paid approximately $14.5 million for these
services. At December 31, 1998, approximately $2.7 million was owed to Precept
and is included in accounts payable and accrued expenses in the accompanying
consolidated balance sheets. No amounts were owed to Precept as of December
31, 1997.
 
  At December 31, 1998, BGFVF had issued a letter of credit for $12.5 million
to support borrowing under the $50.0 million revolving credit facility. Under
a reimbursement agreement with Holdings, if the letter of credit was called,
Holdings was contingently liable to reimburse BGFVF by issuing $12.5 million
of preferred stock at
 
                                     F-21
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
the last issue price. At December 31, 1998, BGFVF had issued a guarantee for
$5.0 million to support borrowing under the $5.0 million bank note payable.
Under a reimbursement agreement with Holdings and HTI, if the guarantee was
called, the Company was contingently liable to reimburse BGFVF by having
Holdings issue $5.0 million of preferred stock, at the last issue price, and
having HTI issue a subordinated note of $5.0 million. Effective as of
January 27, 1999, in connection with the transactions disclosed in the
following paragraph, both reimbursement agreements with BGFVF were terminated
without any actions being taken thereon.
 
  In January 1999, the Company required additional funds under the revolving
credit facility to continue operations, but again did not meet certain
applicable borrowing conditions. The Company was unable to borrow the
additional funds required from its bank lenders. On January 14, 1999, with the
financial backing of BGFVF, the Company received a waiver of certain financial
covenants under the revolving credit facility until June 30, 1999, and the
revolving credit facility was amended to increase the loan commitment
thereunder from $50.0 million to $75.0 million and to permit affiliates of the
Company to participate in any loans made thereunder. The Company used proceeds
under the expanded revolving credit facility to refinance the $5.0 million
bank note payable. At this time, BGFVF purchased junior participations in the
revolving credit facility of $17.5 million and terminated the $12.5 million
letter of credit and the $5.0 million guarantee. The Company terminated the
reimbursement agreements with BGFVF. In addition, through March 30, 1999,
BGFVF has purchased additional junior participations of approximately $17.4
million, resulting in a total participation of approximately $34.9 million. As
a lender under the participation agreement, BGFVF receives interest at the
applicable margin under the revolving credit facility. BGFVF is entitled to
receive additional compensation in the form of a senior unsecured note of the
Company in an aggregate principal amount of up to $5.0 million, under certain
circumstances.
 
17. Quarterly Financial Data (Unaudited)
 
  Selected unaudited quarterly financial data for the years ended December 31,
1998 and 1997 is as follows (in thousands):
 
Year Ended December 31, 1998
 
<TABLE>
<CAPTION>
                                           First   Second    Third    Fourth
                                          Quarter  Quarter  Quarter  Quarter
                                          -------  -------  -------  --------
   <S>                                    <C>      <C>      <C>      <C>
   Operating revenues.................... $23,692  $23,764  $28,904  $ 25,534
   Operating expenses....................  24,091   24,939   29,703    79,878(a)
                                          -------  -------  -------  --------
   Operating loss........................    (399)  (1,175)    (799)  (54,344)
   Interest expense, net.................   3,063    3,278    3,887     4,247
                                          -------  -------  -------  --------
     Net loss............................ $(3,462) $(4,453) $(4,686) $(58,591)
                                          =======  =======  =======  ========
 
Year Ended December 31, 1997
 
<CAPTION>
                                           First   Second    Third    Fourth
                                          Quarter  Quarter  Quarter  Quarter
                                          -------  -------  -------  --------
   <S>                                    <C>      <C>      <C>      <C>
   Operating revenues.................... $15,965  $16,591  $22,746  $ 23,869
   Operating expenses....................  16,925   17,527   22,503    22,677
                                          -------  -------  -------  --------
   Operating income (loss)...............    (960)    (936)     243     1,192
   Interest expense, net.................     995    1,302    2,235     2,953
                                          -------  -------  -------  --------
     Net loss............................ $(1,955) $(2,238) $(1,992) $ (1,761)
                                          =======  =======  =======  ========
</TABLE>
--------
(a) The fourth quarter of 1998 includes non-cash charges of approximately
    $48.1 million related to impairment of long-lived assets.
 
                                     F-22
<PAGE>
 
                HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                       December 31, 1998, 1997, and 1996
 
 
  Admission and concession revenues are subject to seasonal fluctuations which
affect all motion picture exhibitors. These fluctuations are the result of the
distribution practice of the major motion picture studios, which have
historically concentrated the release of the most marketable films during the
summer and year-end holiday seasons when more people have tended to go to the
movies. There are other factors, however, which may affect the Company's
revenues during any particular quarter, including the popularity of films
released during the quarter and the availability of such popular films at the
Company's theaters. As a result, depending on these factors, the Company's
revenues in the first and second quarters may not be as strong as in the third
and fourth quarters.
 
                                     F-23
<PAGE>
 
                                   SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each of the registrants has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
 
                                          Hollywood Theaters, Inc.
                                          Hollywood Theater Holdings, Inc.
                                          Crown Theatre Corporation
 
                                              /s/ Thomas W. Stephenson, Jr.
                                          By: _________________________________
                                                 Thomas W. Stephenson, Jr.
                                                  Chairman of the Board of
                                               Directors, President and Chief
                                                     Executive Officer
 
                                                /s/ James R. Featherstone
                                          By: _________________________________
                                                   James R. Featherstone
                                                  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 each of the
registrants and in the capacities and on the dates indicated.
<TABLE>
 
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----
 
<S>                                    <C>                        <C>
         /s/ John G. Farmer                     Director            March 30, 1999
______________________________________
            John G. Farmer
 
                                                Director
______________________________________
          Thomas L. Harrison
 
       /s/ Thomas G. Mendell                    Director            March 30, 1999
______________________________________
          Thomas G. Mendell
 
         /s/ Harold W. Pote                     Director            March 30, 1999
______________________________________
            Harold W. Pote
 
       /s/ Eric R. Wilkinson                    Director            March 30, 1999
______________________________________
          Eric R. Wilkinson
</TABLE>