<PAGE>   1
                               GC COMPANIES, INC.
                               1996 ANNUAL REPORT



                                     [LOGO]
<PAGE>   2
GC COMPANIES OPERATES GENERAL CINEMA'S MOTION PICTURE EXHIBITION CIRCUIT
CONSISTING OF 1,159 SCREENS AT 189 LOCATIONS NATIONWIDE AT THE END OF FISCAL
1996. IN ADDITION TO ITS THEATRE OPERATIONS, GC COMPANIES MANAGES A POOL OF THE
COMPANY'S CAPITAL THAT IS UTILIZED TO MAKE INVESTMENTS IN A VARIETY OF
INDUSTRIES. 
<PAGE>   3
DEAR SHAREHOLDER:

                        It is with pleasure that we report on the progress of GC
                        Companies. Fiscal year 1996 can be characterized by
                        continued progress on both the strategic and operating
                        fronts of your theatre business and a further
                        enhancement of the Company's investment activities.
                        Together these programs are designed to grow the value
                        of and diversify your Company.

                           Revenues for the year ended October 31, 1996 were
                        $446.0 million compared with $451.3 million for fiscal
                        1995. Net earnings increased 98.1% to $17.2 million, or
                        $2.20 per share, from $8.7 million, or $1.11 per share,
                        in 1995. Our operating earnings, after corporate
                        expenses, increased to $20.3 million, or $1.53 per share
                        after tax, in fiscal 1996, from $18.2 million, or $1.36
                        per share after tax, in the year-earlier period.
                        Full-year 1996 results include a pretax gain of $9.5
                        million on the sale of a minority investment, as well as
                        a pretax charge of $2.5 million relating to a minority
                        investment write-down. The results for fiscal 1995
                        included net pretax charges totaling $6.6 million
                        related to minority investments. GC Companies had fiscal
                        1996 theatre operating earnings of $26.1 million,
                        compared to the $25.9 million in fiscal 1995. In
                        pursuing our goal of continually improving operating
                        margins, we grew our concession business, controlled
                        expenses, added new screens and closed or sold less
                        productive units.

                           We also made important progress in positioning your
                        Company to achieve substantial growth in the coming
                        years. We will continue to pursue the dual goals of
                        continually improving operating margins while building
                        high-impact, state-of-the-art megaplex theatres to meet
                        consumer demand in densely populated urban or suburban
                        areas. Two new megaplexes opened in November 1996 in
                        Chicago, the Northbrook Court 14 and the Randhurst 16,
                        and we have commitments to open 17 new megaplex theatres
                        with approximately 240 screens during the next three
                        years. In fiscal 1997, we plan to open 80 screens in new
                        megaplex theatres in California, Illinois, New Jersey
                        and Pennsylvania. To provide a solid financial
                        foundation for our growth initiatives, we entered into a
                        master operating lease agreement with a major financial
                        institution to provide up to $250 million during the
                        next five years for our theatre building program.

                           Additionally, we have stepped up efforts to close or
                        dispose of less productive units with fewer screens. At
                        fiscal year end 1996, General Cinema Theatres operated
                        1,159 screens in 189 locations for an average 6.1
                        screens per unit, compared to 1,180 screens in 196
                        locations, or an average of 6.0 screens per unit, at
                        fiscal year end 1995.

                           We are well aware of the risks of over building in
                        the exhibition industry and feel that a prudent,
                        disciplined, and selective building program can achieve
                        attractive rates of return on the capital employed. This
                        combination of prudent new investment combined with
                        vigilant pruning of the theatre circuit should position
                        General Cinema Theatres for many years of profitable
                        growth.

                           General Cinema Theatres continues to run one of the
                        most customer-friendly, well maintained, technologically
                        advanced theatre circuits in the industry. We are very
                        proud of our commitment to General Cinema Theatres'
                        entertainment philosophy, which includes delivering
                        superior service, utilizing state-of-the-art audio and
                        visual technology including digital sound systems and
                        introducing leading concession merchandising to enhance
                        the movie-going experience. Through unique product
                        offerings and operating innovations, our concession
                        business generates the highest per capita revenues in
                        the industry. Patrons of our theatres enjoy traditional
                        movie-going favorites as well as specialty products from
                        Starbucks, Taco Bell and Pizzeria Uno. This concession
                        variety, as well as other innovations such as General
                        Cinema's Movie Memorabilia stores creates a special,
                        enjoyable environment for our guests and boosts the
                        profitability of our theatre circuit.



                                       1
<PAGE>   4
                           In order to more fully employ the balance sheet
                        strength of your Company, GC Companies takes investment
                        positions in businesses that we believe will provide
                        substantial returns on the invested cash balances. It is
                        our hope that we can both grow the value of GC Companies
                        and find opportunities to diversify our operational base
                        through this investment process. We were pleased with
                        the progress of our investment activities in 1996.
                        During the fourth quarter, we reported a pretax gain of
                        $9.5 million, or $0.71 per share after tax, from the
                        sale of the Company's radio group investment. In the
                        second quarter, the Company took a pretax loss of $2.5
                        million, or $0.19 per share after tax, relating to our
                        remaining investment in a children's clothing retailer.
                        In the first quarter of 1997, we closed on a $7.0
                        million investment in a wireless location and two-way
                        messaging company.

                           The investment portfolio currently includes minority
                        investments in four companies at an aggregate cost of
                        $57.2 million. In addition to our most recent investment
                        noted above, the portfolio includes a $13.4 million
                        investment in a company which acquires and operates
                        cable television companies in Germany; a $16.6 million
                        investment in a privately held U.K. eyeglass retailer,
                        and a $20.2 million investment in a global
                        telecommunications company.

                           During the year, GC Companies welcomed three
                        important executives to our management team. Gail
                        Edwards joined us in the newly created position of Vice
                        President and Chief Financial Officer. Gail previously
                        was employed by Delaware North Companies Incorporated
                        since 1989, most recently serving as Vice President of
                        Finance and Treasurer. We also welcomed Philip Szabla to
                        the newly created position of Vice President and General
                        Counsel. Since 1979, he was engaged in the private
                        practice of law with the Buffalo firm of Albrecht,
                        Maguire, Heffern & Gregg, P.C. where he was a partner
                        since 1984. At General Cinema Theatres, we welcomed
                        Frank Stryjewski to the position of Senior Vice
                        President of Operations. Frank previously was employed
                        by a major exhibition company since 1978, most recently
                        as Senior Vice President of Operations for that
                        company's south division.

                           GC Companies is poised to continue building value for
                        our shareholders over the coming years. We enter the new
                        year well positioned both strategically and financially.
                        We plan to capitalize on our past successes and look
                        forward to many promising future opportunities. GC
                        Companies' success continues to be possible thanks to
                        you, our shareholders, and our 7,100 employees whose
                        extraordinary commitment to service make our
                        achievements possible.


                        Sincerely,



                        /s/ Richard A. Smith            /s/ Robert A. Smith
                        Richard A. Smith                Robert A. Smith
                        Chairman and                    President and
                        Chief Executive Officer         Chief Operating Officer

                        January 14, 1997

                                       2
<PAGE>   5
GC Companies, Inc.
SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>


(Unaudited)                                                                         Fiscal Years (1)
                                                            ------------------------------------------------------------------
(Dollar amounts in thousands except for per share amounts)      1996          1995           1994           1993          1992
==============================================================================================================================
<S>                                                         <C>           <C>            <C>            <C>            <C>   
Revenues                                                    $446,003      $451,308       $452,563       $495,031       $457,230
Operating earnings                                            20,296        18,164         16,866         18,350         10,213
Investment income (loss), net                                 10,107        (2,316)         1,640             96            477
Interest expense                                                (639)         (631)          (648)          (605)          (655)
Gain (loss) on disposition of theatre assets                    (540)         (463)         5,188           (600)             -
                                                            --------      --------       --------       --------       --------
Earnings before taxes and cumulative effect of
   accounting change                                          29,224        14,754         23,046         17,241         10,035
Income tax expense                                           (11,982)       (6,049)        (9,449)        (6,738)        (3,863)
Accounting change, net of income taxes (2)                         -             -              -              -         (3,182)
                                                            --------      --------       --------       --------       --------
Net earnings                                                $ 17,242      $  8,705       $ 13,597       $ 10,503       $  2,990
                                                            ========      ========       ========       ========       ========
Weighted average number of common
   and common equivalent shares outstanding                    7,851         7,855          7,841              -              -
Net earnings per common share (3)                           $   2.20      $   1.11       $   1.73       $      -       $      -
                                                            ========      ========       ========       ========       ========
Depreciation and amortization                               $ 19,369      $ 19,367       $ 19,649       $ 21,985       $ 20,876
Total assets                                                $314,303      $300,067       $296,658       $210,535       $214,362
Capital lease obligations                                   $  3,059      $  3,623       $  4,179       $  4,756       $  6,108
Other long-term liabilities                                 $ 29,029      $ 28,156       $ 28,016       $ 27,551       $ 25,538
Number of movie screens                                        1,159         1,180          1,211          1,344          1,390
Number of locations                                              189           196            208            245            265
</TABLE>


(1)     The selected financial data are derived from the financial statements of
        the Company and it's predecessor. The historical financial statements of
        the Company for the years prior to 1994 do not necessarily reflect the
        results of operations or the financial position that would have been
        obtained had the Company been an independent public company.

(2)     Represents the cumulative effect of a change in accounting for
        postretirement health care benefits. 

(3)     Net earnings per common share have not been presented for the years
        ended October 31, 1993 and 1992 as the Company was not an independent
        entity with a capital structure of its own during those periods. 3



                                       3
<PAGE>   6
GC Companies, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


           YEAR ENDED OCTOBER 31, 1996 COMPARED WITH YEAR ENDED OCTOBER 31, 1995

           Net earnings increased 98.1% to $17.2 million in 1996 from $8.7
           million in 1995. Net earnings in 1996 included a pretax gain of $9.5
           million from the sale of GC Companies' (GCC or the Company) radio
           group investment, a pretax charge of $2.5 million related to the
           write-down of the Company's remaining investment in a children's
           clothing retailer, and $3.8 million of dividend and interest income
           from short-term investments. Net earnings in 1995 included pretax
           charges totaling $7.9 million related to write-downs of two minority
           investments, $1.3 million of dividend income received from another
           minority investment and $4.3 million of dividend and interest income
           from short-term investments. Theatre operating earnings increased to
           $26.1 million in 1996 from $25.9 million in 1995. Operating earnings
           after corporate expenses for 1996 were $20.3 million, an increase of
           11.7% from $18.2 million in 1995.

           Theatre revenues
           
           Revenues of $446.0 million were slightly below 1995 revenues of
           $451.3 million. The decrease was principally due to a 3.6% decline in
           patronage, partially offset by a 1.5% increase in the average ticket
           price and a 3.2% increase in concession sales per patron. The
           increase in concession sales per patron was attributable to both
           higher consumption and higher prices. The decrease in patronage from
           1995 was due to the lack of strong film product in the latter half of
           the fiscal year as well as the sale or closing of 20 theatres with 86
           screens during 1996 and late 1995. These dispositions were consistent
           with the Company's strategy to sell or close theatres which are less
           productive and have fewer screens per location. At October 31, 1996
           the Company operated 1,159 screens compared to 1,180 screens at
           October 31, 1995.

           Cost of theatre operations

           Cost of theatre operations, including theatre general and
           administrative expenses, of $419.9 million in 1996 decreased 1.3%
           from $425.4 million in the previous year. As a percentage of
           revenues, the cost of theatre operations was 94.1% in 1996 compared
           to 94.3% in 1995. The improvement was primarily attributable to cost
           containment efforts both at home office and the field, partially
           offset by a lower film gross margin.

           Corporate expenses

           Corporate expenses decreased 25.0% to $5.8 million in 1996 from $7.8
           million in 1995. The cost savings primarily resulted from a reduction
           in corporate and administrative services provided to the Company by
           Harcourt General, Inc. (Harcourt General).

           Investment income (loss), net

           The Company recorded net investment income of $10.1 million in 1996
           compared to a net investment loss of $2.3 million in 1995. The
           Company's investment income in 1996 included a pretax net gain of
           $9.5 million recorded in the fourth quarter relating to the sale of
           the Company's radio group investment, a second-quarter pretax charge
           of $2.5 million related to the write-off of the Company's remaining
           investment in a children's clothing retailer, a $0.6 million pretax
           charge recorded in the first quarter representing the Company's share
           of losses incurred by its radio group investment when such investment
           was accounted for under the equity method, and $3.8 million of
           dividend and interest income. The Company determined that the
           write-off of its remaining investment 

                                       4
<PAGE>   7
           in the children's clothing retailer was necessary due to that
           company's continued operating losses and cash flow problems. 

           The Company's net investment loss in 1995 included a $5.0 million
           pretax charge recorded in the fourth quarter of 1995 to write down a
           substantial portion of the Company's investment in a children's
           clothing retailer, a $2.9 million pretax charge recorded in the first
           quarter of 1995 to write off the Company's remaining investment in a
           food service company, $1.3 million of dividend income received from
           another minority investment and $4.3 million of dividend and interest
           income. The decrease in dividend and interest income in 1996 was due
           to a lower rate of return on portfolio assets.

           Income tax expense

           GCC's effective tax rate was 41.0% in 1996, unchanged from 1995.

           YEAR ENDED OCTOBER 31, 1995 COMPARED WITH YEAR ENDED OCTOBER 31, 1994

           Net earnings decreased 36.0% to $8.7 million in 1995 from $13.6
           million in 1994. Net earnings in 1995 included pretax charges
           totaling $7.9 million related to write-downs of two minority
           investments. The Company's dividend and interest income in 1995 was
           $5.6 million. Net earnings in 1994 included a $5.2 million pretax
           gain on the sale of 23 theatres, $2.8 million of interest and
           dividend income and a $1.2 million pretax minority investment loss.
           Theatre operating earnings increased 15.1% to $25.9 million in 1995
           from $22.5 million in 1994. Operating earnings after corporate
           expenses for 1995 were $18.2 million, an increase of 7.7% from $16.9
           million in 1994.

           Theatre revenues

           Total revenues of $451.3 million were slightly below 1994 revenues of
           $452.6 million. The decrease was principally due to a 4.8% decline in
           patronage, substantially offset by a 3.2% increase in the average
           ticket price and a 7.6% increase in concession sales per patron. The
           increase in concession sales per patron was attributable to both
           higher consumption and higher prices. The decrease in patronage from
           1994 was primarily due to the sale or closing of 12 theatres with 54
           screens during the fiscal year. These dispositions were consistent
           with the Company's strategy to sell or close theatres which are less
           productive and have fewer screens per location. The Company operated
           1,180 screens at October 31, 1995 compared to 1,211 screens at
           October 31, 1994.

           Cost of theatre operations

           Cost of theatre operations, including theatre general and
           administrative expenses, of $425.4 million in 1995 decreased slightly
           from $430.0 million in the previous year. As a percentage of
           revenues, the cost of theatre operations was 94.3% in 1995 compared
           to 95.0% in 1994. The improvement was primarily attributable to
           higher film gross margins, partially offset by higher concession
           costs.

           Corporate expenses

           Corporate expenses increased to $7.8 million in 1995 from $5.6
           million in 1994. The increase was principally due to increased
           charges for corporate and administrative services provided to the
           Company by Harcourt General and to expenses associated with the
           Company's investment operations.

           Investment income (loss), net

           The Company's investment loss included a $2.9 million pretax charge
           recorded in the first quarter of 1995 to write off the Company's
           remaining investment in a food service company and a $5.0 million
           pretax charge recorded in the fourth quarter of 1995 to write down
           the Company's investment 

                                       5
<PAGE>   8
           in a children's clothing retailer. The Company determined that the
           write-down of its investment in the children's clothing retailer was
           necessary because expected improvements in that company's sales and
           operating margins during the critical "back-to-school" season did not
           materialize and because of overall weakness in the retail environment
           generally. These charges were reduced by $1.3 million of dividend
           income received from another minority investment. In addition, with
           respect to the Company's cash, cash equivalents and short-term
           investments, the Company earned dividend and interest income of $4.3
           million, up from $2.8 million in 1994, due to both a higher rate of
           return on and an increase in the amount of those assets.

           Gain (loss) on disposition of theatre assets

           A net pretax loss of $0.5 million resulted from the disposition of 12
           theatre units in 1995. In 1994, the Company recorded a pretax gain of
           $5.2 million on the disposition of 23 theatre units.

           Income tax expense

           GCC's effective tax rate was 41.0% in 1995, unchanged from 1994.

           LIQUIDITY AND CAPITAL RESOURCES

             Virtually all of GCC's revenues are collected in cash, principally
           through theatre admissions and concession sales. Because revenues are
           received in cash prior to the payment of related expenses, the
           Company has historically not required working capital to finance its
           growth or to meet its operating requirements. Cash generated by the
           business in excess of that needed for operations and capital
           expenditures will be available for investment.

             The Company's investing activities primarily relate to the opening
           of new theatres, the renovation of existing theatres and investing in
           other companies. During 1996, theatre capital expenditures amounted
           to $10.8 million. A total of eight new screens were added to two
           locations. Capital expenditures were down significantly from the
           prior year because of the use, in the second half of 1996, of the
           Company's new operating lease facility described below. Total capital
           expenditures for the motion picture exhibition business are expected
           to approximate $9.2 million in 1997.

             The Company has commitments to open 17 new megaplex theatres with
           approximately 270 screens during the next three years, including 80
           screens in fiscal 1997. Two new units with a combined 30 screens
           opened in the Chicago area in November 1996. The Company has an
           agreement with a major financial institution to provide operating
           leases for up to $250 million of assets over the next five years for
           its theatre circuit expansion program. At October 31, 1996, current
           assets included a $17.6 million receivable due from this institution.
           The Company collected this receivable in December 1996.

             During 1996, the Company closed eight units with 32 screens. In
           addition, the Company announced in October 1996 that its theatre
           circuit has targeted smaller, older units with approximately 280
           screens for sale or trade. These dispositions would be consistent
           with the Company's strategy to sell or close theatres which are less
           productive and have fewer screens.

             In October 1996, GCC realized a $9.5 million pretax gain upon the
           sale of its investment in a radio group that operated radio stations
           in the San Francisco, Las Vegas and Albuquerque markets. GCC received
           total proceeds of $22.8 million relating to these sales transactions.
           GCC's portion of funds remaining in escrow relating to these
           transactions amount to $0.6 million.

             During July and August 1996, the Company invested a total of $20.2
           million in an international telecommunications company with
           operations in Europe, the Commonwealth of Independent States, India
           and China. On December 6, 1996, the Company invested $7.0 million in
           a wireless location and two-way messaging company.

             The Company has significant lease commitments. Minimum lease 
           payments totaled $57.7 million in 1996 and minimum lease payments 
           from existing obligations are expected to approximate $58.9 million
           in 1997. Additional lease commitments will arise as the Company
           implements its new operating lease facility.


                                       6
<PAGE>   9
             In December 1996, the Company's Board of Directors authorized the
           repurchase of up to one million shares of the Company's common stock
           over the next twelve months. The repurchases may be made through open
           market and private transactions, subject to market conditions.

             The Company believes that cash generated from operations, cash and
           short-term investments on hand, the $50.0 million available under the
           Company's revolving credit agreement, which expires in March 1997,
           and the operating lease arrangement will be sufficient to fund
           operating requirements, capital expenditures and the Company's
           investment activities for the foreseeable future.

           SEASONALITY

           GCC's revenues and operating earnings are significantly affected by
           the commercial success of the films that are exhibited. Major film
           distributors release most of the films which they anticipate will be
           the most commercially successful during GCC's first and third fiscal
           quarters. Accordingly, a significant portion of GCC's revenues and
           operating earnings from theatre operations occur in those periods.

           IMPACT OF INFLATION

           GCC's financial statements are prepared on a historical cost basis
           under generally accepted accounting principles. GCC adjusts its
           prices to maintain profit levels, and will continue to do so as
           competitive conditions permit. In general, management believes that
           the impact of inflation is not material to the financial condition or
           results of operations of the Company.

           RECENT ACCOUNTING PRONOUNCEMENTS

           In October 1995, the Financial Accounting Standards Board (FASB)
           issued Statement of Financial Accounting Standards No. 123,
           "Accounting for Stock-Based Compensation" (SFAS 123), which is
           effective for transactions entered into in fiscal years that begin
           after December 15, 1995. SFAS 123 establishes a fair value based
           method of accounting for stock-based compensation plans, which may be
           recognized or disclosed at the Company's option. The Company will
           adopt the disclosure approach beginning in fiscal year 1997. The
           effect of adopting SFAS 123 is not expected to be material to the
           Company's financial position or results of operations.

           FORWARD-LOOKING STATEMENTS

           From time to time, the Company or its representatives have made or
           may make forward-looking statements, orally or in writing, including
           those contained herein. Such forward-looking statements may be
           included in, without limitation, reports to stockholders, press
           releases, oral statements made with the approval of an authorized
           executive officer of the Company and filings with the Securities and
           Exchange Commission. The words or phrases "anticipates," "expects,"
           "will continue," "estimates," "projects," or similar expressions are
           intended to identify "forward-looking statements" within the meaning
           of the Private Securities Litigation Reform Act of 1995.

             The results contemplated by the Company's forward-looking 
           statements are subject to certain risks, trends, and uncertainties 
           that could cause actual results to vary materially from anticipated 
           results, including without limitation, delays in obtaining leases for
           new megaplex locations, construction risks and delays, the lack of
           strong film product, the impact of competition, market and other 
           risks associated with the Company's investment activities and other
           factors described herein.

                                       7
<PAGE>   10
GC Companies, Inc.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                  October 31,
                                                           ------------------------
(In thousands)                                                   1996          1995
===================================================================================
<S>                                                        <C>            <C>
Assets
Current assets
   Cash and cash equivalents                               $   71,745     $  35,999
   Short-term investments                                       1,566        35,313
   Receivable due from financing institution                   17,599             -
   Other current assets                                         3,602         5,664
   Deferred income taxes                                        2,552         2,850
                                                           ----------     ---------
         Total current assets                                  97,064        79,826
Land                                                            4,607         4,607
Buildings and improvements                                     27,777        27,834
Leasehold improvements                                        145,872       142,933
Equipment and fixtures                                        147,705       144,135
                                                           ----------     ---------
                                                              325,961       319,509
Less accumulated depreciation and amortization               (163,980)     (148,233)
                                                           ----------     ---------
                                                              161,981       171,276
Other assets                                                   55,258        48,965
                                                           ----------     ---------
                                                           $  314,303     $ 300,067
                                                           ==========     =========  
Liabilities and Shareholders' Equity
Current liabilities
   Current maturities of long-term obligations             $      721     $     716
   Trade payables                                              30,514        33,094
   Other current liabilities                                   62,428        61,713
                                                           ----------     ---------
         Total current liabilities                             93,663        95,523
Long-term liabilities
   Capital lease obligations                                    3,059         3,623
   Other long-term liabilities                                 29,029        28,156
                                                           ----------     ---------
         Total long-term liabilities                           32,088        31,779
Deferred income taxes                                          12,571        14,061
Commitments and contingencies
Shareholders' equity
   Common stock - $.01 par value
Authorized - 25,000
      Issued and outstanding - 7,816 and 7,812                     78            78
   Additional paid-in capital                                 136,359       136,324
   Retained earnings                                           39,544        22,302
                                                           ----------     ---------
         Total shareholders' equity                           175,981       158,704
                                                           ----------     ---------
                                                           $  314,303     $ 300,067
                                                           ==========     =========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       8
<PAGE>   11
GC Companies, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>

                                                                       Years ended October 31,
                                                              -------------------------------------
(In thousands except for per share amounts)                        1996           1995          1994
===================================================================================================
<S>                                                           <C>            <C>           <C>
Revenues
   Admissions                                                 $302,852       $309,562      $315,343
   Concessions                                                 131,500        132,159       129,080
   Other                                                        11,651          9,587         8,140
                                                              --------       --------      --------
                                                               446,003        451,308       452,563
Costs of theatre operations
   Film rentals                                                155,441        156,626       163,204
   Concessions                                                  24,522         27,547        25,412
   Theatre operations and administrative expenses              220,561        221,848       221,786
   Depreciation and amortization                                19,369         19,367        19,649
                                                              --------       --------      --------
                                                               419,893        425,388       430,051
Corporate expenses                                               5,814          7,756         5,646
                                                              --------       --------      --------
Operating earnings                                              20,296         18,164        16,866
Investment income (loss), net                                   10,107         (2,316)        1,640
Interest expense                                                  (639)          (631)         (648)
Gain (loss) on disposition of theatre assets                      (540)          (463)        5,188
                                                              --------       --------      --------
Earnings before income taxes                                    29,224         14,754        23,046
Income tax expense                                             (11,982)        (6,049)       (9,449)
                                                              --------       --------      --------
Net earnings                                                  $ 17,242       $  8,705      $ 13,597
                                                              ========       ========      ========
Weighted average number of common and
   common equivalent shares outstanding                          7,851          7,855         7,841
                                                              ========       ========      ========

Net earnings per common share                                 $   2.20       $   1.11      $   1.73
                                                              ========       ========      ========
</TABLE>




See Notes to Consolidated Financial Statements.

                                       9
<PAGE>   12
GC Companies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                       Years ended October 31,
                                                              -------------------------------------
(In thousands except for per share amounts)                        1996           1995          1994
===================================================================================================
<S>                                                           <C>            <C>           <C>
Cash flows from operating activities
   Net earnings                                               $ 17,242       $ 8,705       $ 13,597
   Adjustments to reconcile net earnings to net cash
      provided by operating activities
         Depreciation and amortization                          19,369        19,367         19,649
         Deferred income taxes                                  (1,192)       (1,880)        (4,285)
         (Gain) loss from minority investments                  (6,307)        7,877          1,167
         Loss (gain) on disposition of theatre assets              540           463         (5,188)
         Changes in assets and liabilities
            Trade payables                                      (2,580)       (5,971)         5,037
            Other current assets and liabilities               (14,822)        1,799         (1,465)
                                                              --------       -------       --------
   Net cash provided by operating activities                    12,250        30,360         28,512
                                                              --------       -------       --------
Cash flows from investing activities
   Capital expenditures                                        (10,750)      (17,326)        (9,549)
   Proceeds from the disposition of theatre assets                 758         3,263         21,249
   Proceeds from the liquidation of (purchase of)
      short-term investments                                    33,747       (35,313)             -
   Proceeds from the sale of investment                         22,825               -            -
   Purchase of investments                                     (20,195)      (29,385)       (24,738)
   Other investing activities                                   (3,409)         (535)        (1,911)
                                                              --------       -------       --------
   Net cash provided (used) by investing activities             22,976       (79,296)       (14,949)
                                                              --------       -------       --------
Cash flows from financing activities
   Distribution from Harcourt General                                -             -         63,573
   Other financing activities                                      520           (86)            95
                                                              --------       -------       --------
   Net cash provided (used) by financing activities                520           (86)        63,668
                                                              --------       -------       --------
   Net change in cash and cash equivalents                      35,746       (49,022)        77,231
Cash and cash equivalents at beginning of year                  35,999        85,021          7,790
                                                              --------       -------       --------
Cash and cash equivalents at end of year                      $ 71,745       $35,999       $ 85,021
                                                              ========       =======       ========
</TABLE>



See Notes to Consolidated Financial Statements.

                                       10
<PAGE>   13
GC Companies, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>


                                               Common Stock           Additional
                                          -----------------------      Paid-in       Retained
(In thousands)                            Shares           Amount      Capital       Earnings        Total
===========================================================================================================
<S>                                       <C>              <C>        <C>            <C>           <C>
Balance at October 31, 1993                    -             -               -             -              -
   Issuance of common stock                7,780           $78        $135,726             -       $135,804
   Net earnings                                -             -               -       $13,597         13,597
   Other equity transactions                  22             -             122             -            122
                                           -----           ---        --------       -------       --------
Balance at October 31, 1994                7,802            78         135,848        13,597        149,523
   Net earnings                                -             -               -         8,705          8,705
   Other equity transactions                  10             -             476             -            476
                                           -----           ---        --------       -------       --------
Balance at October 31, 1995                7,812            78         136,324        22,302        158,704
   Net earnings                                -             -               -        17,242         17,242
   Other equity transactions                   4             -              35             -             35
                                           -----           ---        --------       -------       --------
Balance at October 31, 1996                7,816           $78        $136,359       $39,544       $175,981
                                           =====           ===        ========       =======       ========
</TABLE>


See Notes to Consolidated Financial Statements.

                                       11

<PAGE>   14
GC Companies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.                      ORGANIZATION
================================================================================

                        GC Companies, Inc. (GCC or the Company) operates a
                        motion picture exhibition business and manages a pool of
                        the Company's capital for investments. The Company was
                        incorporated in September 1993 as a wholly-owned
                        subsidiary of Harcourt General, Inc. (Harcourt General).
                        In December 1993, Harcourt General completed a spin-off
                        of GCC in a tax-free distribution to Harcourt General's
                        shareholders. Under the plan of distribution, Harcourt
                        General transferred to GCC net assets related to its
                        motion picture exhibition business with a book value of
                        $135.8 million, which included $64.0 million in cash.

2.                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================

                        Principles of Presentation

                        The consolidated financial statements include the
                        accounts of GCC and all of its majority-owned
                        subsidiaries. Where GCC has the ability to exercise
                        significant influence over the operating and financial
                        policies of companies in which GCC has invested, those
                        investments are accounted for under the equity method,
                        and GCC's share of the net earnings or losses of those
                        companies is included in consolidated net earnings;
                        other investments are carried at the lower of cost or
                        fair market value. All significant intercompany accounts
                        and transactions have been eliminated.

                           As a result of the spin-off, Harcourt General has no
                        ownership interest in GCC. However, GCC and Harcourt
                        General have entered into various agreements which
                        govern their ongoing relationship, including a
                        Reimbursement and Security Agreement and an Intercompany
                        Services Agreement.

                           Under the Reimbursement and Security Agreement, GCC
                        has agreed to indemnify Harcourt General from losses
                        Harcourt General could incur due to its secondary
                        liability on theatre leases which were transferred to
                        GCC as part of the spin-off. In order to secure its
                        obligations under the Reimbursement and Security
                        Agreement, GCC pledged all of the stock of its theatre
                        subsidiaries to Harcourt General. In addition, GCC has
                        agreed to certain financial covenants for the benefit of
                        Harcourt General.

                           Under the Intercompany Services Agreement entered
                        into at the time of the spin-off, Harcourt General
                        provided certain management, accounting, financial,
                        legal, tax and other corporate services to GCC. The fees
                        for these services, which totaled $1.1 million in 1996,
                        $3.1 million in 1995 and $1.7 million in 1994, were
                        based on Harcourt General's costs. This agreement was
                        modified effective November 1, 1995 to reduce the level
                        of intercompany services which Harcourt General provides
                        to GCC. The Intercompany Services Agreement provides for
                        the services of Harcourt General's Chairman and Chief
                        Executive Officer to serve as the Chairman and Chief
                        Executive Officer of the Company, and one of Harcourt
                        General's Presidents and Co-Chief Operating Officers to
                        serve as President and Chief Operating Officer of GCC,
                        and such additional corporate services as GCC and
                        Harcourt General may mutually determine from time to
                        time. The fees payable to Harcourt General under the
                        Intercompany Services Agreement have been, and will
                        continue to be, subject to the approval of a committee
                        of independent directors of GCC who are not affiliated
                        with Harcourt General.



                                       12
<PAGE>   15
                        Cash Equivalents

                        Cash equivalents consist of highly liquid investments
                        with maturities of three months or less from the date of
                        purchase. Cash equivalents are stated at cost plus
                        accrued interest, which approximates market value. The
                        Company's policy is to invest cash with financial
                        institutions or in instruments that have acceptable
                        credit ratings and to limit the amount of credit
                        exposure to any one financial institution or issuer.

                        Short-Term Investments

                        Short-term investments, which consist of commercial
                        paper, certificates of deposit, corporate debt
                        securities and U.S. Government securities, are carried
                        at cost plus accrued interest, which approximates fair
                        value.

                        Property and Equipment

                        Property and equipment are stated at cost, less
                        accumulated depreciation and amortization. Depreciation
                        and amortization are provided using the straight-line
                        method over the estimated useful lives of 20 to 30 years
                        for buildings and improvements and 3 to 20 years for
                        equipment and fixtures. 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.

                           When property and equipment are retired or have been
                        fully depreciated, the cost and the related accumulated
                        depreciation are eliminated from the respective
                        accounts. Gains or losses arising from dispositions of
                        property and equipment are reported as income or
                        expense.

                        Long-Lived Assets

                        On an on-going basis, the Company evaluates the carrying
                        value of its long-lived assets relying on a number of
                        factors, including operating results, future anticipated
                        cash flows, business plans and certain economic
                        projections. In addition, the Company's evaluation
                        considers nonfinancial data such as changes in the
                        operating environment, competitive information, market
                        trends and business relationships. The Company believes
                        the carrying value of its long-lived assets at October
                        31, 1996 to be economically recoverable.

                        Income Taxes

                        Income taxes are calculated in accordance with Statement
                        of Financial Accounting Standards No. 109, which
                        requires the asset and liability method of accounting
                        for income taxes.

                        Revenues

                        Revenues are recognized when admission and concession
                        proceeds are received at the theatres. Revenues for
                        other services are recognized at the time those services
                        are rendered.

                        Film Rental Costs

                        Film rental costs are recognized as a percentage of
                        admission revenue and in accordance with the terms of
                        the film licenses.

                        Net Earnings Per Common and Common Equivalent Share

                        Net earnings per common share are based upon the
                        weighted average number of common and, when dilutive,
                        common equivalent shares outstanding during the year.
                        Net earnings per common and common equivalent share,
                        assuming full dilution, have not been presented because
                        the dilutive effect is not material.


                                       13
<PAGE>   16
                        Significant Estimates

                        In the process of preparing its consolidated financial
                        statements, the Company estimates the appropriate
                        carrying value of certain assets and liabilities which
                        are not readily apparent from other sources. The primary
                        estimates underlying the Company's consolidated
                        financial statements include accruals for pension and
                        postretirement benefits, self insurance and other
                        matters. Actual results could differ from these
                        estimates. Management bases its estimates on historical
                        experience and on various assumptions which are believed
                        to be reasonable under the circumstances.

                        Recent Accounting Pronouncements

                        In October 1995, the Financial Accounting Standards
                        Board (FASB) issued Statement of Financial Accounting
                        Standards No. 123, "Accounting for Stock-Based
                        Compensation" (SFAS 123), which is effective for
                        transactions entered into in fiscal years that begin
                        after December 15, 1995. SFAS 123 establishes a fair
                        value based method of accounting for stock-based
                        compensation plans, which may be recognized or disclosed
                        at the Company's option. The Company will adopt the
                        disclosure approach beginning in fiscal year 1997. The
                        effect of adopting SFAS 123 is not expected to be
                        material to the Company's financial position or results
                        of operations.

                        Changes in Presentation

                        Certain prior year amounts have been reclassified to
                        conform to the current year presentation.

3.                      OTHER ASSETS
================================================================================

                        Included in other assets at October 31 were the
                        following investments in other companies, which are
                        accounted for under the cost method at October 31, 1996:
<TABLE>
<CAPTION>

                        (In thousands)                                          1996            1995
                        ============================================================================
<S>                     <C>                                                    <C>           <C>
                        International telecommunications service provider      $20,195       $     -
                        Optical superstore retailer                             16,624        16,624
                        German cable television systems operator                13,368        13,368
                        Radio station operator                                       -        12,485
                        Children's apparel retailer                                  -         2,500
                                                                               -------       -------
                                                                               $50,187       $44,977
                                                                               =======       =======
</TABLE>

                        During July and August 1996, the Company invested a
                        total of $20.2 million in an international
                        telecommunications company with operations in Europe,
                        the Commonwealth of Independent States, India and China.

                           Gains or losses recognized on these investments are
                        discussed in Note 12.


                                       14
<PAGE>   17
4.                      OTHER CURRENT LIABILITIES
================================================================================

                        Other current liabilities consisted of the following at
                        October 31:

<TABLE>
<CAPTION>

                        (In thousands)                                          1996            1995
                        ============================================================================
                        <S>                                                    <C>            <C>
                        Rent and related charges                               $11,035        $11,983
                        Payroll and related benefits                             5,827          6,543
                        Self insurance                                          14,198         13,887
                        Deferred income                                         15,668         14,461
                        Other                                                   15,700         14,839
                                                                               -------        -------
                                                                               $62,428        $61,713
                                                                               =======        =======
</TABLE>

5.                      LONG-TERM LIABILITIES
================================================================================

                        Other long-term liabilities consisted of the following
                        at October 31:

<TABLE>
<CAPTION>

                        (In thousands)                                          1996            1995
                        ============================================================================
                        <S>                                                    <C>           <C>
                        Deferred lease obligations                             $18,651       $18,012
                        Postretirement health care benefits (see Note 10)        6,270         6,341
                        Other                                                    4,108         3,803
                                                                               -------       -------
                                                                               $29,029       $28,156
                                                                               =======       =======
</TABLE>

                        The present value of the future minimum lease payments
                        due under capital lease obligations are as follows:
<TABLE>
<CAPTION>

                        (In thousands)                        Capital Leases
                        ====================================================
                        <S>                                    <C>
                        1997                                         $  564
                        1998                                            598
                        1999                                            567
                        2000                                            626
                        2001                                            661
                        Thereafter                                      607
                                                                     ------
                                                                     $ 3,623
                                                                     ======= 
</TABLE>

                        The net book value of property under capital leases was
                        $1.7 million at October 31,  1996 and $2.0c million at 
                        October 31, 1995.


                                       15
<PAGE>   18
6.                      REVOLVING CREDIT AGREEMENT
================================================================================

                        The Company has a revolving credit agreement with two
                        banks pursuant to which the Company may borrow up to
                        $50.0 million. The rate of interest payable varies
                        according to one of two options selected by the Company.
                        The Company is required to pay a facility fee on the
                        total amount of the revolving credit facility and a
                        commitment fee on the unused portion of the facility.
                        This agreement expires in March 1997. This agreement
                        contains provisions requiring, among other restrictions,
                        the maintenance of a minimum net worth, restrictions on
                        the payment of dividends and limitations on the issuance
                        of additional debt. There have not been any borrowings
                        under this agreement in any of the last three years.

7.                      SHAREHOLDERS' EQUITY
================================================================================

                        Common Stock

                        Common Stock is entitled to dividends if declared by the
                        Board of Directors, and each share carries one vote.
                        Holders of Common Stock have no cumulative voting,
                        redemption or preemptive rights.

                        Common Stock Incentive Plan

                        The Company has a Common Stock incentive plan which
                        provides for the granting of stock options, stock
                        appreciation rights, restricted stock or other stock
                        based awards. In connection with the spin-off from
                        Harcourt General, certain options to purchase Harcourt
                        General Common Stock held by employees of GCC were
                        converted into options to purchase GCC Common Stock
                        pursuant to a formula calculated following the spin-off.
                        After the spin-off, GCC issued options at prices and in
                        amounts determined by application of that formula. The
                        term of all converted options was not changed. Options
                        outstanding at October 31, 1996, which include the
                        converted options, were granted at prices not less than
                        100% of the fair market value on the date of original
                        grant. At October 31, 1996, option exercise prices
                        ranged from $15.81 to $35.00 per share and the options
                        had terms which expire between 1997 and 2005. There were
                        54 employees with options outstanding at October 31,
                        1996. The weighted average exercise price for all
                        outstanding options at October 31, 1996 was $24.58.

                           At October 31, 1996, there were 518,939 shares of
                        Common Stock available for grants under the plan.

                           Option activity was as follows:
<TABLE>
<CAPTION>
                                                                                Years ended October 31,
                                                                          ------------------------------------
                                                                             1996           1995          1994
                        ======================================================================================
                        <S>                                               <C>            <C>           <C>
                        Options outstanding - beginning of year           137,949        189,574             -
                        Conversion of Harcourt General options                  -              -       152,539
                        Granted                                            30,475         25,350        53,792
                        Exercised                                         (15,220)       (50,812)       (7,605)
                        Canceled                                          (14,984)       (26,163)       (9,152)
                                                                          -------        -------       -------
                        Options outstanding - end of year                 138,220        137,949       189,574
                                                                          =======        =======       =======
                        Exercisable options - end of year                  70,211         71,938        93,800
                                                                          =======        =======       =======
                        Restricted Common Stock issued                          -              -        12,343
                                                                          =======        =======       =======
</TABLE>







                                       16
<PAGE>   19
8.                      RETIREMENT PLANS
================================================================================

                        GCC has a non-contributory defined benefit pension plan
                        covering substantially all full-time employees. GCC also
                        sponsors an unfunded supplemental executive retirement
                        plan which provides certain employees additional pension
                        benefits. Benefits under the plans are based on years of
                        service and compensation prior to retirement. When
                        funding is required for the defined benefit plans, the
                        policy is to contribute amounts that are deductible for
                        federal income tax purposes. Pension plan assets consist
                        primarily of equity and fixed income securities.

                           After the spin-off, the projected benefit obligations
                        relating to GCC employees were assumed by the GCC
                        defined benefit plans, and approximately $20.4 million
                        in plan assets was transferred from Harcourt General's
                        defined benefit pension plan to the GCC defined benefit
                        pension plan.

                        Net pension income included the following components:

<TABLE>
<CAPTION>
                                                                                Years ended October 31,
                                                                          ------------------------------------
                                                                             1996           1995          1994
                        ======================================================================================
                        <S>                                               <C>            <C>           <C>
                        Service cost                                      $   426        $   595       $   469
                        Interest cost on projected benefit obligation       1,104          1,388         1,249
                        Actual return on plan assets                       (3,952)        (1,826)          337
                        Net amortization and deferral                       1,423           (275)       (2,436)
                                                                          -------        -------       -------
                        Net pension income                                $  (999)       $  (118)      $  (381)
                                                                          =======        =======       =======
</TABLE>

                        The significant actuarial assumptions as of the year-end
                        measurement dates were as follows:

<TABLE>
<CAPTION>
                                                                                Years ended October 31,
                                                                          ------------------------------------
                                                                             1996           1995          1994
                        ======================================================================================
                        <S>                                               <C>            <C>           <C>
                        Discount rate                                     7.5%           7.5%          7.5%
                        Rate of compensation increases                    5.0%           5.0%          5.0%
                        Rate of return on plan assets                     9.0%           9.0%          9.0%
</TABLE>


                                       17
<PAGE>   20
                        The plans' funded status and amounts recognized in the
                        consolidated balance sheets at October 31 were as
                        follows:
<TABLE>
<CAPTION>

                                                                                    1996                         1995
                                                                          ----------------------------------------------------
                                                                            Funded       Unfunded         Funded      Unfunded
                        (In thousands)                                        Plan           Plan           Plan          Plan
                        ======================================================================================================
                        <S>                                               <C>            <C>            <C>           <C>
                        Vested benefit obligation                         $10,864        $ 1,133        $13,020       $   896
                                                                          =======        =======        =======       =======
                        Accumulated benefit obligation                    $11,532        $ 1,300        $13,563       $ 1,362
                                                                          =======        =======        =======       =======
                        Projected benefit obligation                      $14,328        $ 1,572        $18,084       $ 1,907
                        Pension plan assets at fair value                  25,431              -         22,294             - 
                                                                          -------        -------        -------       -------
                        Overfunded (unfunded) projected obligations        11,103         (1,572)         4,210        (1,907)
                        Unrecognized net asset at transition               (1,412)             -         (1,765)            -
                        Unrecognized net (gain) loss                       (7,333)           235         (1,268)          545
                                                                          -------        -------        -------       -------
                        Pension asset (liability) recognized in
                           the balance sheet                              $ 2,358        $(1,337)       $ 1,177       $(1,362)
                                                                          =======        =======        =======       =======
</TABLE>


                        In addition to the defined benefit plans, GCC has two
                        defined contribution plans for certain employees. The
                        GCC Savings Plan permits employee contributions and
                        provides for certain matching contributions by the
                        Company. The GCC Employee Stock Ownership Plan (ESOP) is
                        non-contributory.

9.                      COMMITMENTS AND CONTINGENCIES
================================================================================

                        Leases

                        GCC conducts a significant part of its operations in
                        leased premises under noncancelable leases, the majority
                        with terms of 20 years. These leases generally provide
                        for the payment of fixed monthly rentals, contingent
                        rentals based on a percentage of revenue over a
                        specified amount and the payment of property taxes,
                        common area maintenance, insurance and repairs. At its
                        option, GCC can renew a substantial portion of such
                        leases for various periods up to 20 years. Certain of
                        GCC's leases require periodic increased rentals. The
                        rental costs on these leases have been recognized on a
                        straight-line basis and are included in deferred lease
                        obligations. On theatre locations assigned to third
                        parties, GCC is secondarily liable for certain lease
                        commitments which extend through 2023 and totaled
                        approximately $80.8 million at October 31, 1996.

                           Assuming renewal options are not exercised, the
                        future minimum payments under noncancelable operating
                        leases as of October 31, 1996 were as follows:
<TABLE>
<CAPTION>

                        (In thousands)                       Operating Leases
                        =====================================================
                        <S>                                      <C>
                        1997                                     $ 58,902
                        1998                                       58,639
                        1999                                       58,094
                        2000                                       57,402
                        2001                                       56,678
                        Thereafter                                395,338
                                                                 --------
                                                                 $685,053
                                                                 ========
</TABLE>



                                       18
<PAGE>   21
                        Rent expense under noncancelable leases was as follows:


<TABLE>
<CAPTION>
                                                                                Years ended October 31,
                                                                          ------------------------------------
                                                                             1996           1995          1994
                        ======================================================================================
                        <S>                                               <C>            <C>           <C>
                        Minimum rentals                                   $57,683        $57,218       $56,064
                        Percentage rentals based on revenues                3,913          4,744         5,269
                                                                          -------        -------       -------
                                                                          $61,596        $61,962       $61,333
                                                                          =======        =======       =======
</TABLE>

                           The Company has an agreement with a major financial
                        institution to provide operating leases for up to $250
                        million of assets over the next five years for its
                        theatre circuit expansion program. At October 31, 1996,
                        current assets included a $17.6 million receivable due
                        from this institution related to leases covered under
                        this new agreement. The Company collected this
                        receivable in December 1996.

                        Litigation

                        GCC is involved in various suits and claims in the
                        ordinary course of business. Management does not believe
                        that the disposition of such suits and claims will have
                        a material adverse effect upon the consolidated
                        financial position or continuing operations of the
                        Company.

10.                     POSTRETIREMENT HEALTH CARE BENEFITS
================================================================================

                        The Company provides health care benefits for retired
                        employees which are funded as claims are incurred.
                        Retirees and active employees hired prior to March 1,
                        1989 are eligible for these benefits if they meet
                        certain service and minimum age requirements. The
                        Company paid $233,000, $251,000 and $149,000 during
                        fiscal 1996, 1995 and 1994, respectively, for
                        postretirement health care benefit claims.

                           The actuarial present value of accumulated
                        postretirement benefit obligations and the amounts
                        recognized in GCC's consolidated balance sheets as of
                        October 31 were as follows:
<TABLE>
<CAPTION>

                        (In thousands)                                         1996           1995
                        ===========================================================================
                        <S>                                                  <C>            <C>
                        Retirees                                             $3,014         $3,527
                        Fully eligible active plan participants                 525            778
                        Other active plan participants                          653            882
                        Unrecognized net gain                                 2,078          1,154
                                                                             ------         ------
                        Accrued postretirement benefit obligation            $6,270         $6,341
                                                                             ======         ======
</TABLE>


                                       19
<PAGE>   22
                        The postretirement benefit cost relating to GCC's
                        employees was as follows:

<TABLE>
<CAPTION>
                                                                                Years ended October 31,
                                                                          ------------------------------------
                                                                           1996           1995          1994
                        ======================================================================================
                        <S>                                               <C>            <C>           <C>
                        Service cost                                      $  34          $  51         $ 115
                        Interest cost on accumulated postretirement
                           benefit obligation                               299            367           384
                        Net amortization                                   (171)          (130)         (154)
                                                                          -----          -----         -----
                        Net postretirement benefit cost                   $ 162          $ 288         $ 345
                                                                          =====          =====         =====
</TABLE>

                        The assumed health care cost trend rate used in
                        measuring the accumulated postretirement benefit
                        obligation was 15% in fiscal 1995 and 14% in fiscal
                        1996, gradually declining to 5% in fiscal 2005.
                        Measurement of the accumulated postretirement benefit
                        obligation was based on an assumed 7.5% discount rate in
                        each of the last three years.

                           If the health care cost trend rate assumptions were
                        increased by 1%, the accumulated postretirement
                        obligation as of October 31, 1996 would be increased by
                        $450,000. The effect of this change on the service cost
                        and interest cost would be an aggregate increase of
                        $37,000.

11.                     INCOME TAXES
================================================================================

                        Income tax expense was as follows:
<TABLE>
<CAPTION>
                                                     Years ended October 31,
                                               ------------------------------------
                                                1996           1995          1994
                        ===========================================================
                        <S>                    <C>            <C>           <C>
                        Current
                           Federal             $10,379        $ 6,108       $ 9,013
                           State                 2,795          1,821         3,521
                                               -------        -------       -------
                                                13,174          7,929        12,534
                        Deferred
                           Federal              (1,017)        (1,383)       (1,928)
                           State                  (175)          (497)       (1,157)
                                               -------        -------       -------
                                                (1,192)        (1,880)       (3,085)
                                               -------        -------       -------
                                               $11,982        $ 6,049       $ 9,449
                                               =======        =======       =======
</TABLE>

                        GCC's effective income tax rate was 41.0% in 1996, 1995
                        and 1994. The differences between the statutory federal
                        tax rate and the effective tax rate are due primarily to
                        state income taxes.

                           The Company paid approximately $11.3 million, $9.0
                        million and $13.1 million in income taxes during the
                        years ended October 31, 1996, 1995 and 1994,
                        respectively.


                                       20
<PAGE>   23
                        Significant components of the Company's net deferred
                        income tax liability stated on a gross basis at October
                        31 were as follows:
<TABLE>
<CAPTION>

                        (In thousands)                                    1996           1995
                        ===================================================================== 
                        <S>                                            <C>             <C>
                        Gross deferred income tax assets
                           Financial accruals and reserves             $ 2,504        $ 3,048
                        Postretirement health care benefits              2,631          2,663
                           Self insurance accruals                       2,004          1,677
                                                                       -------        -------
                              Total deferred tax assets                  7,139          7,388
                        Gross deferred income tax liabilities
                           Property and equipment                       17,158         18,599
                                                                       -------        -------
                              Net deferred tax liability               $10,019        $11,211
                                                                       =======        =======
</TABLE>




12.                     Net Investment INCOME (LOSS)
================================================================================

                        Investment income (loss) consisted of the following:

<TABLE>
<CAPTION>
                                                                   Years ended October 31,
                                                             ------------------------------------
                                                             1996              1995          1994
                        =========================================================================
                        <S>                                  <C>            <C>           <C>
                        Interest income                      $ 2,593        $ 2,894       $ 1,483
                        Dividend income                        1,207          1,413         1,324
                        Gain on sale of investment, net        9,452              -             -
                        Loss from minority investments, net   (3,145)        (6,623)       (1,167)
                                                             -------        -------       -------
                        Net investment income (loss)         $10,107        $(2,316)      $ 1,640
                                                             =======        =======       =======
</TABLE>

                        In October 1996, GCC realized a $9.5 million net pretax
                        gain upon the liquidation of its investment in a radio
                        group that operated radio stations in the San Francisco,
                        Las Vegas and Albuquerque markets. GCC received
                        aggregate proceeds of $22.8 million relating to these
                        sales transactions. GCC's portion of funds remaining in
                        escrow relating to these transactions amount to $0.6
                        million.

                           In April 1996, the Company recorded a $2.5 million
                        pretax charge to write off its remaining investment in a
                        children's clothing retailer as a result of that
                        company's continued cash flow problems and operating
                        losses. Loss from minority investments in 1996 also
                        included a $0.6 million pretax charge recorded in the
                        first quarter, representing the Company's share of
                        losses incurred by its radio group investment, when such
                        investment was accounted for under the equity method.

                           Net loss from minority investments in 1995 consisted
                        of a fourth-quarter $5.0 million write-down of the
                        investment in a children's clothing retailer and a
                        first-quarter $2.9 million write-off of the remaining
                        investment in a food service company, reduced by
                        dividend income of approximately $1.3 million from the
                        Company's eyeglass retailer minority investment. The
                        1994 amount represents GCC's equity in the losses of the
                        food service company.




                                       21
<PAGE>   24
13.                     COMPARATIVE QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
================================================================================



<TABLE>
<CAPTION>

                                                                                          1996
                                                                      -----------------------------------------------------
                                                                         First    Second        Third      Fourth      Full
                        (In thousands except for per share amounts)    Quarter   Quarter      Quarter     Quarter      Year
                        ====================================================================================================
                        <S>                                           <C>       <C>          <C>        <C>        <C>     
                        Revenues                                      $126,482  $ 95,567     $137,301   $  86,653  $446,003
                        Gross profit                                    21,363    11,736       25,676       7,681    66,456
                        Net earnings (loss)                              5,668    (1,392)       8,428       4,538    17,242
                        Net earnings (loss)
                           per common share                           $   0.72  $  (0.18)    $   1.07   $    0.58  $   2.20
                                                                      ========  ========     ========   =========  ========
</TABLE>


<TABLE>
<CAPTION>

                                                                                          1995
                                                                      -----------------------------------------------------
                                                                         First    Second        Third      Fourth      Full
                        (In thousands except for per share amounts)    Quarter   Quarter      Quarter     Quarter      Year
                        ====================================================================================================
                        <S>                                           <C>       <C>          <C>        <C>        <C>     
                        Revenues                                     $124,170   $ 86,876     $138,852   $101,410   $451,308
                        Gross profit                                   20,439      9,262       24,548     13,559     67,808
                        Net earnings (loss)                             3,923       (939)       8,032     (2,311)     8,705
                        Net earnings (loss)
                           per common share                          $   0.50   $  (0.12)    $   1.02   $  (0.30)  $   1.11
                                                                     ========   ========     ========   ========   ========
</TABLE>


                                       22
<PAGE>   25
INDEPENDENT AUDITORS' REPORT


                        Board of Directors and Shareholders
                        GC Companies, Inc.
                        Chestnut Hill, Massachusetts

                        We have audited the consolidated balance sheets of GC
                        Companies, Inc. as of October 31, 1996 and 1995, and the
                        related consolidated statements of earnings,
                        shareholders' equity and cash flows for each of the
                        three years in the period ended October 31, 1996. These
                        financial statements are the responsibility of the
                        Company's management. Our responsibility is to express
                        an opinion on these financial statements based on our
                        audits.

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

                           In our opinion, the consolidated financial statements
                        present fairly, in all material respects, the financial
                        position of GC Companies, Inc. as of October 31, 1996
                        and 1995, and the results of its operations and its cash
                        flows for each of the three years in the period ended
                        October 31, 1996 in conformity with generally accepted
                        accounting principles.




                        /s/ Deloitte & Touche LLP

                        Boston, Massachusetts
                        December 6, 1996




                                       23
<PAGE>   26
DIRECTORS AND OFFICERS

<TABLE>
<CAPTION>

               Directors                                     Corporate Officers
               <S>                                           <C>   
               Richard A. Smith                              Richard A. Smith
               Chairman and                                  Chairman and
               Chief Executive Officer;                      Chief Executive Officer
               Chairman and Chief Executive Officer of
               Harcourt General, Inc. and                    Robert A. Smith
               The Neiman Marcus Group, Inc.                 President and
                                                             Chief Operating Officer
               William L. Brown *
               Former Chairman                               Paul R. Del Rossi
               Bank of Boston Corporation                    President and
                                                             Chief Executive Officer
               Peter C. Read *                               General Cinema Theatres, Inc.
               Former Executive Vice President
               Bank of Boston Corporation                    William B. Doeren
                                                             Executive Vice President and
               Francis E. Sutherby *                         Chief Operating Officer
               Former Partner                                General Cinema Theatres, Inc.
               Deloitte & Touche
                                                             John G. Berylson
                                                             Senior Vice President and
                                                             Chief Investment Officer

                                                             G. Gail Edwards
                                                             Vice President, Chief Financial Officer
                                                             and Treasurer

                                                             Philip J. Szabla
                                                             Vice President, General Counsel
                                                             and Secretary


              *Audit Committee
               Compensation Committee
               Special Review Committee
</TABLE>

                                       24
<PAGE>   27
SHAREHOLDER INFORMATION


                        Requests for general information or published financial
                        information can be made in writing to GC Companies,
                        Inc., 27 Boylston Street, Chestnut Hill, MA 02167,
                        telephone (617) 278-5600.

                        Transfer Agent and Registrar

                        The First National Bank of Boston
                        c/o Boston EquiServe Limited Partnership
                        Post Office Box 1865
                        Boston, MA 02105
                        (800) 730-4001

                        Form 10-K

                        Additional copies of the Company's Form 10-K as filed
                        with the Securities and Exchange Commission are
                        available upon written request to the Secretary of the
                        Company.

                        Annual Meeting

                        The Annual Meeting of Stockholders will be held on
                        Wednesday, March 12, 1997 at 10:00 A.M. at the Company's
                        corporate headquarters at 27 Boylston Street, Chestnut
                        Hill, Massachusetts.

                        Stock Information

                        GC Companies' Common Stock is traded on the New York
                        Stock Exchange under the symbol "GCX". The following
                        table indicates the quarterly price range of GC
                        Companies' Common Stock for the past two fiscal years.

<TABLE>
<CAPTION>

                                                    1996                         1995
                        --------------------------------------------------------------------
                        Quarter             High            Low           High           Low
                        ====================================================================
                        <S>               <C>            <C>            <C>           <C>
                        First             $35.25         $32.00         $31.13        $24.75
                        Second            $38.00         $32.75         $35.00        $29.88
                        Third             $37.75         $33.50         $34.50        $32.00
                        Fourth            $37.88         $33.25         $34.75        $31.50
</TABLE>

                        GC Companies had approximately 7,816 million shares of
                        Common Stock outstanding and approximately 3,575 Common
                        shareholders of record at October 31, 1996.
<PAGE>   28
Corporate Address

GC Companies, Inc.
27 Boylston St.
Chestnut Hill, MA 02167
GC Companies and General Cinema: (617) 277-4320
Shareholder Information: (617) 278-5600