<PAGE>   1
                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
     ACT OF 1934
                   FOR THE FISCAL YEAR ENDED JANUARY 31, 1999

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934 FOR
     
                THE TRANSITION PERIOD FROM ________ TO ________.
                           COMMISSION FILE NO. 0-28072

                      WEST COAST ENTERTAINMENT CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


          DELAWARE                                      04-3278751
(STATE OR OTHER JURISDICTION OF         (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)

         ROUTE 413 AND DOUBLE WOODS ROAD, LANGHORNE, PENNSYLVANIA     19047
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                  (ZIP CODE)


       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 968-4318

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                     COMMON STOCK, $.01 PAR VALUE PER SHARE
                                (TITLE OF CLASS)


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

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

    The aggregate market value as of April 22, 1999 of Common Stock held by
non-affiliates of the Registrant was approximately $4,826,111

    The number of shares of Common Stock outstanding as of April 22, 1999 was
14,084,704.


DOCUMENTS INCORPORATED BY REFERENCE

The Registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended January 31,
1999. Portions of such Proxy Statement are incorporated by reference in Part III
of this Annual Report on Form 10-K.


                      WEST COAST ENTERTAINMENT CORPORATION
                                       1
<PAGE>   2
                         1999 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                             PAGE
                                                                             ----
                                          PART I                                 
<S>                                                                           <C>
Item 1.      Business                                                           3
Item 2.      Properties                                                        11  
Item 3.      Legal Proceedings                                                 12
Item 4.      Submission of Matters to a Vote of Security Holders                   
             Executive Officers                                                12   

                                          PART II                                
Item 5.      Market for the Registrants' Common Stock and Related Stockholder    
             Matters                                                           13

Item 6.      Selected Consolidated Financial Data                              13  
Item 7.      Management's Discussion and Analysis of Financial Condition and       
             Results of Operations                                             14
Item 8.      Financial Statements and Supplementary Data                       24  
Item 9.      Changes in and Disagreements with Accountants on Accounting and       
             Financial Disclosure                                              41

                                         PART III                                  
Item 10.     Directors and Executive Officers of the Registrant                42  

Item 11.     Executive Compensation                                            43  
Item 12.     Security Ownership of Certain Beneficial Owners and Management    46  
Item 13.     Certain Relationships and Related Transactions                    47  

                                          PART IV                                
Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K   47  
</TABLE>



                                       2
<PAGE>   3
                                     PART I

ITEM 1.  BUSINESS

GENERAL

    West Coast Entertainment Corporation (the "Company") is one of the largest
owners, operators and franchisors of video retail specialty stores in the United
States in terms of system-wide revenues. The Company competes directly against
major regional and national video rental stores in most of its markets and
believes it is the leading video specialty retailer, in terms of number of
stores, in many of the major markets in which Company-owned stores operate. At
January 31, 1999, the Company owned and operated 261 video specialty stores and
franchised 160 video specialty stores located in 22 states, principally in the
Northeast and Midwest.

    The Company is a leading video specialty retailer whose stores are designed
and managed to create an atmosphere that enhances the appreciation of movies,
children's video programming and video games. In general, the Company's stores
rent and sell videocassettes, rent video games and sell certain popular
electronic accessories along with a variety of confectionery items. Sites for
the Company's stores, within each designated trade area, are selected on the
basis of such factors as visibility, ready accessibility (particularly for
evening drivetime parking), signage and adaptability of existing structures to
the Company's requirements, as well as cost considerations. The Company's stores
vary in layout and inventory according to local market needs. The Company's
stores range in size from 750 square feet to 12,000 square feet and generally
carry a comprehensive selection of 7,000 to 17,000 prerecorded videocassettes.
System-wide, a substantial majority of the Company's stores are currently
operated under the West Coast Video(R) name; the remainder are operated under
names such as Videosmith(R).

    As described in more detail below, the Company's long term strategy is to
expand its presence by developing new stores, expanding its franchise system
through acquisitions and area development agreements and by selectively
acquiring independently owned stores as well as stores owned by existing West
Coast Video(R) franchisees, subject to the availability of financing to the
Company.

INDUSTRY OVERVIEW

     According to Paul Kagan Associates ("Paul Kagan"), the United States
videocassette rental and sales industry has grown from $9.8 billion in revenue
in 1990 to approximately $16.8 billion in revenue in 1998, and is expected to
reach $20.8 billion in 2002. The video retail industry is highly fragmented, and
in recent years has been characterized by increased consolidation as larger
superstore chains continue to increase market share by opening new stores and
acquiring smaller, local operators. According to the Video Software Dealers
Association ("VSDA"), the video retailing industry association, the number of
video specialty stores operating in 1998 was between 25,000 and 30,000. The
Company believes that additional consolidation will continue as the video retail
industry evolves from smaller, local stores to regional and national superstore
chains. The Company believes that, although video specialty store revenues will
continue to grow as consumers rent and purchase prerecorded videos, a greater
rate of growth will occur among those operators engaged in acquisitions.

     Paul Kagan reports that the video retail industry represented the single
largest source of revenue to movie studios and accounted for approximately $6.7
billion, or 48.5%, of the $13.8 billion of estimated domestic studio revenue in
1998. Of the hundreds of movies produced and released by the major studios each
year in the U.S., relatively few are profitable for the movie studios based on
box office revenue alone. According to the Motion Picture Association of America
("MPAA"), between 1990 and 1997 only 7.2% of all movies released generated in
excess of $20 million in U.S. theater revenue for studios; over the same period,
members of the MPAA reported that the average production, advertising and
distribution cost of such movies increased from $38.8 million to $75.7 million
per movie. The Company believes its customers are more likely to rent or
purchase "non-hit" movies on videocassette than on any other medium because
video retail stores provide a compelling opportunity to shop and make an impulse
choice among a very broad selection of new title releases. As a result, video
retail stores, including those operated by the Company, selectively purchase
movies on videocassette regardless of whether the movies were successful at the
box office, thus providing the independent and major movie studios a reliable
source of revenue for almost all of the hundreds of movies produced each year.
Thus, the Company believes movie studios have many 


                                       3
<PAGE>   4
compelling reasons to protect this unique and significant source of revenue.

     The U.S. video retail industry includes both rentals and sales of
prerecorded videocassettes. Movie studios determine the suggested retail prices
to both consumers and video rental stores and, through that pricing, influence
the relative levels of videocassette rental and sales. Videocassettes released
at a relatively high price, typically $60 to $65 wholesale, are generally
purchased by video retail stores and promoted primarily as rental titles and
then later re-released by the studios at a lower price, typically $10 to $20
wholesale, to promote sales directly to consumers ("sell-through"). Select high
grossing box office films, generally with box office revenue in excess of $100
million, are released on videocassette at a relatively low initial price,
typically $12 to $17 wholesale, and are generally purchased by video retailers,
mass merchants, grocery stores and other retailers and promoted both as rental
titles and for sell-through.

During 1998, a number of major studios and large video retailers adopted revenue
sharing as an alternative to historical business models of directly purchasing
rental titles. Under revenue sharing the retailer typically incurs an upfront
fee to acquire videocassettes, with an ongoing requirement to share the revenue
generated on a pre-determined percentage over a specific period of time with the
studios. Given the purported lower cost of product, the retailer has the
additional requirement of acquiring 2 to 4 times the number of copies of a title
than it would have acquired under the traditional purchase model.

    Historically, new technologies have led to the creation of additional
distribution channels for movie studios. Movie studios seek to maximize their
revenue by releasing movies in sequential release date "windows" to various
distribution channels. These distribution channels include, in the customary
order of release date: movie theaters; airlines and hotels; video specialty
stores; pay-per-view satellite and cable television systems ("Pay-Per-View");
premium cable television; basic cable television and, finally, network and
syndicated television. The Company believes that this method of sequential
release has allowed movie studios to increase their total revenue with
relatively little adverse effect on the revenue derived from previously
established distribution channels and it is anticipated that movie studios will
continue the practice of sequential release even as near video on demand
("NVOD") and, eventually, video on demand ("VOD") become more readily available
to the consumer. According to Paul Kagan, most movie studios release hit movie
videocassettes to the home video market from 30 to 80 days (extending up to 120
days for certain titles priced for sale rather than rental) prior to the
Pay-Per-View release date.


INTELLECTUAL PROPERTY

    The Company owns a number of trademarks, trade names and service marks
including West Coast Video(R), The Movie Buff's Movie Store(R), Game Power
Headquarters(TM), net.spot(TM), The Projector(TM), Spotlight on Video(TM) as
well as Videosmith(R) and other trade names under which certain recently
acquired stores are currently conducting business pending their transition to
the West Coast Video(R) name and signage. The Company has acquired an exclusive
licensing arrangement to reproduce and utilize graphically enhanced versions of
Bernard of Hollywood(TM) photographs of legendary actors and actresses which are
currently utilized inside the Company's stores and may also be utilized for
other promotional purposes and on merchandise produced by the Company to be sold
in its stores.


BUSINESS STRATEGY

    The Company's strategy is to strengthen its position as an industry leader
while maximizing revenues and operating cash flow. The key elements of the
Company's operating strategy are:

    -   Building a Strong Presence in Selected Markets. The Company seeks to
        concentrate its stores in chosen markets where it believes that prime
        video locations are difficult to obtain and where it ranks among the two
        leading video retailers. In each of the New York-New Jersey Metro,
        Boston, Philadelphia, Dayton and Louisville metropolitan areas, the
        Company believes that it has more outlets than all, or all but one, of
        its competitors. This concentration enables the Company to conduct
        highly targeted marketing programs to maximize penetration within its
        selected markets, to maximize operating efficiencies in inventory
        management, training and store supervision and to promote accessibility
        to customers.

                                       4
<PAGE>   5
    -   Capitalizing on Economies of Scale. Due to its size, the Company enjoys
        key operating efficiencies, including substantial discounts in
        purchasing video products and advertising media. The Company has
        developed sophisticated in-house capabilities in marketing, purchasing,
        management information systems ("M.I.S.")/telecommunications, retailing
        and other areas of operations which provide critical management support
        services to its stores. The Company employs software systems for the
        purposes of monitoring and managing store inventory, sales, purchases
        and customer memberships.

    -   Customizing Purchasing for Local Demographics. The Company's in-house
        purchasing department tailors its selection of newly released titles and
        video games to the specific demographics of each Company-owned store
        and, through its proprietary monthly publication, "The Projector,"
        suggests specific purchase quantities on a title-by-title basis for
        franchised stores having varying demographic profiles and sales volumes.

    -   Employing New Store Design. As of January 31, 1999, the Company
        completed nearly three years of design and testing of a new store format
        that it believes provides video customers with the premier retailing
        experience in the industry. Elements of this new design were chosen to
        receive the 1997 Mobius Award, an international advertising design
        award, in the Company's fourth quarter. New initial test stores opened
        utilizing this format have operated at a revenue level substantially in
        excess of the Company's current average revenue per store.

    -   Providing Comprehensive Customer Service. The Company believes that it
        builds customer loyalty and promotes additional store visits and product
        rentals by offering superior customer service through a highly trained
        sales force having comprehensive product knowledge. The Company's
        approach is epitomized by its slogan The Movie Buff's Movie Store.(R)The
        Company believes its sales force's appreciation and understanding of
        movies, children's video programming and interactive electronic
        entertainment products can result in a higher level of service than most
        of its competitors. An important criterion used in the Company's
        recruitment and selection of employees is their general knowledge in
        regard to movies and electronic games. In addition, employees undergo
        continuous training to increase their knowledge about the store's video
        titles and about cinema and electronic games in general. The Company
        believes that the implementation of this strategy in the stores which it
        acquires can result in higher sales per customer, higher overall
        customer satisfaction, higher customer loyalty, lower employee turnover
        levels and higher catalog title inventory turnover.


The key elements of the Company's growth strategy will be:

    -   Selectively Developing New Stores. Subject to the availability of
        capital, the Company plans to open, expand and relocate video retail
        stores in locations where extensive store location studies indicate a
        substantial probability of success. Most of these locations will be
        within the Company's existing areas of geographic concentration.

    -   Expanding the Company's Franchise System through Area Development
        Agreements and Acquisitions. The Company intends to continue to enter
        into area development agreements which contemplate the establishment of
        20 or more stores within a given territory by a single developer. See
        "-- Franchising." The Company also intends to expand the geographic
        scope of its franchise system. The Company believes that it can grow its
        franchise system without significant additional capital expenditure and
        without significant general and administrative overhead.

    The Company is currently seeking alternative financing sources, as well as
pursuing other strategic initiatives and has engaged an investment bank to
explore alternatives including, but not limited to a merger, sale, refinancing,
or partial divestiture.


OPERATIONS

    The Company's operating systems have been developed and tested over many
years. Management believes that these systems will allow the Company to manage
operations without incurring substantial incremental general and 


                                       5
<PAGE>   6
administrative expense. At January 31, 1999, the West Coast corporate staff
included 79 professionals working in the following capacities:

    MARKETING/MOVIES & GAMES MANAGEMENT. The Company currently has in place a
centralized professional marketing department supporting all of the Company's
video specialty stores. The Company's in-house art department provides the
resources of a full service agency and utilizes an integrated computerized
system for in house scanning, page layout and mechanical production,
illustrations and color printing. Management believes this in-house creative
capacity has resulted in substantial cost savings and enhanced production
efficiencies for the Company's owned and operated stores and franchised stores.

    The Company develops an extensive quarterly marketing campaign several
months in advance of its implementation period. The store managers' kits for
these campaigns provide national and regional promotions and media flight
schedules in a format that is designed to facilitate local store customization.
The campaigns have earned a wide variety of national awards from the VSDA in the
past six years, including "Best Overall Campaign," "Best Community Service" and
"Best Special Media/Special Events." These campaigns have increased the
familiarity of existing and potential customers with the Company and are also
intended to increase customer rental and purchase transactions and frequency of
visits.

    The Company uses radio and newspaper advertising and direct mail
solicitation to promote its business in the markets in which the Company
competes and uses television advertising in those metropolitan areas where the
Company is a dominant player. The marketing department has a dedicated staff
that publishes and distributes a proprietary, full color monthly consumer
magazine, "Spotlight on Video(TM)," which promotes new releases and special
offers exclusive to the Company.

    The costs of the Company's marketing department are funded in part by a
contribution from West Coast's domestic franchisees that is required to be
devoted to advertising and marketing. Such contribution is equal to 1% of the
franchisees' gross revenues. Another 1% contribution is required to be devoted
to local advertising. In addition to these contributions, the Company offsets
the costs of its advertising with cooperative advertising funds and market
development funds made available by movie studios and suppliers to promote
certain videocassettes.

    PURCHASING. The Company believes that the consistent selection of movies
that appeal to the consumer is a significant feature of its operations. The
Company's movie and electronic entertainment purchasers each have, on average,
over eight years of industry experience. The rental entertainment purchasers use
computerized purchasing models that analyze data in regard to the sales and
rental performance of individual titles from the Company's stores on-line
through the Company's Point of Sale ("POS") systems. The Company also publishes
a proprietary monthly publication, "The Projector(TM)," for owned and operated
stores and franchised stores that projects suggested purchase quantities on a
title-by-title basis for stores of varying demographic profiles and rental
volume levels. The Company believes its purchasing department has considerable
specific expertise in evaluating, finding distribution sources for and
purchasing independent, arthouse, foreign and other highly entertaining films
that are frequently not noticed or are ignored by other video specialty chains.

    M.I.S./TELECOMMUNICATIONS. The Company utilizes POS software systems with
continuous inventory and customer database and extensive management reporting
capabilities. Nearly all of its franchisees utilize compatible POS software. In
1999, the Company intends to upgrade its POS system in an effort to make more
detailed data available more quickly on a system-wide basis. In addition, the
Management Information Systems department provides a broad range of services to
management as well as to owned and operated stores and franchised stores. Such
services include: management of various relational databases which aid in movie
and interactive electronic entertainment products purchasing; store site
evaluation and selection and customer profiling and targeting; on-line POS and
other store and corporate software maintenance, service and repair; technical
support for the installation of store computer hardware and software;
maintenance of hardware support agreements; on-line verification of franchisee
revenues for royalty audit purposes; Company and franchisee staff POS system
training; and enhancement and upgrading of POS software.


                                       6
<PAGE>   7
    RETAIL OPERATIONS. The Company has developed comprehensive retail operations
policy and procedure manuals to achieve standardization among its Company-owned
stores, as well as its franchisees. In addition, the Company's retail operations
group works directly with both corporate and franchisee stores to provide
assistance on a broad range of operational issues including: competitive
strategies; product pricing; revenue enhancement; expense management; risk
management; loss prevention for security and safety systems; new site analysis
and selection; remerchandising and renovation plans and analysis. The retail
operations group provides training and orientation as well as ongoing training
programs to corporate store personnel as well as franchisees. The retail
operations group has also developed a detailed timetable and manual and provides
direct assistance in the opening of Company owned and operated stores as well as
new franchised stores, including obtaining permits/licenses, providing opening
checklists and store configuration options, formulating construction guidelines,
initiating vendor contacts, helping to manage and meet exterior signage
specifications, wage and hiring guidelines, and developing professional service
and vendor contacts.

DEVELOPMENT OF THE COMPANY

    West Coast Entertainment Corporation is a Delaware corporation established
by Ralph W. Standley III and T. Kyle Standley in February 1995 (originally under
the name RKT Acquisition Co.) for two purposes: (i) to combine four corporations
(the "Predecessor Corporations") through which the Standley family had
theretofore conducted their video store business and (ii) to acquire
substantially all of the operating assets relating to franchise operations of
West Coast Video Entertainment, Inc., an unrelated third party, and its four
affiliated corporations. In July 1995, each of the Predecessor Corporations,
Giant Video Corporation ("GVC"), Nostalgia Ventures, Inc. ("NVI"), G.V.
Management Corp. ("GVMC") and Videosmith (DE) Incorporated ("VDI"), merged with
and into the Company ("the Merger"). As a result of the Merger, the former
stockholders of the Predecessor Corporations became stockholders of the Company.
Simultaneously, the Company, through its wholly-owned subsidiary West Coast
Franchise, a Delaware corporation, acquired substantially all of the
franchise-related operating assets of the West Coast Entertainment Incorporated
Companies, which had previously conducted a video store franchising business
under independent ownership in Philadelphia, Pennsylvania.

    The Predecessor Corporations that were merged into the Company had
previously conducted their respective operations under substantially common
ownership. GVC, an Ohio corporation, was incorporated in 1989 and opened its
first video specialty store in Dayton, Ohio in June 1989. In April 1993, all of
the outstanding stock of NVI, an Ohio corporation with seven stores in the
Greater Dayton area, was acquired by the controlling stockholders of GVC from
unrelated third parties. In August 1994, the controlling stockholders of NVI,
together with certain other investors, acquired from an unrelated third party
through VS Acquisition Corp., a newly formed Delaware corporation ("VSAC"), all
of the outstanding stock of VDI, the parent of Videosmith Incorporated, a
Massachusetts corporation with 14 stores in Massachusetts. Shortly thereafter,
VSAC merged with and into VDI. In May 1992, the controlling stockholders of GVC
formed an Ohio corporation, GVMC, which provided management services to certain
of the other corporations.

    The Company's growth since fiscal 1997 is described under "-- Acquisitions."

    On May 17, 1996, West Coast Entertainment Corporation completed an initial
public offering which consisted of 5,400,000 shares of common stock at $13.00
per share (the "Offering"). The net proceeds of the Offering after deducting
applicable issuance costs and expenses, were $60.8 million. The proceeds were
used to fund certain of the acquisitions discussed below and to repay
approximately $9.6 million in long-term debt.


ACQUISITIONS

YEAR ENDED JANUARY 31, 1998

June, 1997 Acquisitions

On June 16, 1997, and June 24, 1997 the Company acquired a total of 38 video
specialty stores (the "June 1997 Acquisitions"), including 5 stores owned by a
franchisee of the Company, for aggregate consideration of $17.9 million
consisting of $17.2 million in cash and approximately $0.7 million of
acquisition costs.

                                       7
<PAGE>   8
YEAR ENDED JANUARY 31, 1999

There were no significant acquisitions by the Company during the year ended
January 31, 1999.



STORE LOCATIONS

    The following table lists the number of stores owned and franchised by the
Company in each state or foreign country at January 31, 1999.
<TABLE>
<CAPTION>

                                          NUMBER OF                       
                                          OWNED AND        NUMBER OF        TOTAL
                                       OPERATED STORES  FRANCHISED STORES   STORES
                                       ----------------------------------------------
<S>                                    <C>               <C>                <C>
          STATE OR FOREIGN COUNTRY
          Pennsylvania                      49                 65                114
          New Jersey                        60                 25                85
          Massachusetts                     35                 10                45
          New York                          33                 2                 35
          Ohio                              30                 5                 35
          Kentucky                          16                 -                 16
          Louisiana                          5                 11                16
          Indiana                            9                 1                 10
          Florida                            5                 4                 9
          Maryland                           -                 8                 8
          Virginia                           8                 -                 8
          Illinois                           -                 7                 7
          Arkansas                           5                 -                 5
          Mississippi                        -                 5                 5
          Canada                             -                 4                 4
          Oklahoma                           3                 -                 3
          Texas                              2                 1                 3
          Connecticut                        -                 2                 2
          Curacao                            -                 2                 2
          Delaware                           1                 1                 2
          Minnesota                          -                 2                 2
          Peru                               -                 2                 2
          California                         -                 1                 1
          New Hampshire                      -                 1                 1
          Arizona                            -                 1                 1
                                                              
                                                              
                   Total..........         261                160              421
                                           ===                ===              ===
</TABLE>

                                                          

PRODUCTS AND PRICING

    The Company's primary source of revenue is the rental of videocassettes. The
Company's stores feature between 7,000 and 17,000 videocassettes. At present,
the Company's stores generally rent new release titles overnight, depending on
the age and popularity of the title, while catalog titles rent for four to six
nights. The Company regularly reviews and determines its rental prices for
titles based on the length of time each title has been available on
videocassette and the frequency of rentals for each title. Movie titles are
classified into a variety of thematic categories, including certain categories
which are custom tailored to local tastes and demographic profiles and are
displayed alphabetically within those categories. The Company attempts to keep
available within each store sufficient numbers of current popular titles, as
well as a significant selection of catalog titles, to satisfy customer demand.

    The Company also offers videocassettes for sale. Generally, previously
viewed videocassettes are sold beginning 6 to 12 weeks after a new title is
released to video specialty stores depending on the popularity of the product.
Sales of new videocassettes are generally priced at $10.99 to $20.99. In
addition to video rentals and sales, the Company also rents and sells video game
products compatible with various game hardware platforms and personal computers.
Media consultant and economist Wilkofsky Gruen Associates, Inc. ("Gruen
Associates") has estimated that domestic interactive electronic entertainment
software revenue will increase from approximately $5.7 billion in 1995 to


                                       8
<PAGE>   9
approximately $8.8 billion in 2002. The Company expects per store rental revenue
of interactive electronic entertainment products to increase because of an
overall rise in the popularity of new hardware formats. As a result, the Company
believes that its interactive electronics will experience significant growth in
the next several years.

SUPPLIERS

    The Company is contractually obligated to purchase from Ingram Entertainment
("Ingram") the lesser of 30% of its annual requirements of rental videocassettes
and video game products or $25 million through July 12, 2000 and the lesser of
25% of its annual requirements or $25 million through July 12, 2002. Ingram may
terminate this contract at any time for any reason upon 90 days prior written
notice. The Company currently receives marketing funds and an advertising
allowance from Ingram based upon a percentage of the Company's videocassette and
video game purchases. If the relationship with Ingram were terminated, the
Company believes that it could readily obtain its required inventory of
videocassettes and video games from alternative suppliers at prices and on terms
comparable to those with Ingram.

FRANCHISING

    The Company's existing franchise agreements call for the Company to receive
approximately 7% of each franchisee's monthly gross revenues, subject to stated
monthly minimum royalties. Of this amount, the Company is required to devote an
amount equal to 2% of such monthly gross revenues to direct and indirect
advertising and marketing programs. The Company also receives a one-time fee
upon execution of the franchise agreement. Franchisees are not required to
purchase their initial inventory or supplies from the Company, although they
sometimes do so. Thereafter, franchisees purchase virtually all of their movie
and interactive game product from unaffiliated suppliers.

    Franchisees are entitled to develop West Coast Video(R) stores at approved
locations within a specified geographic area under the terms of a standard
franchise agreement. The exclusivity accorded to a franchisee generally does not
extend beyond a radius of three miles from each franchised location, with
franchisees in urban locations often being limited to a one-half to one mile
radius. Franchises are typically awarded for a term of ten years, subject to the
franchisee's right to renew for additional ten-year periods.

    The Company provides training for the franchisee's managers and other store
personnel. Franchisees are required to meet the Company's quality control
standards in regard to store appearance and size of videocassette inventory,
among other things. The Company provides advice about title selection, initial
promotional advertising, posters and brochures.

    Each franchise owner has sole responsibility for all operational decisions
and financing commitments relating to the store, including monthly rent,
utilities and payroll. Franchisees are required to indemnify the Company against
claims arising from the franchisee's operations and to provide specified amounts
of insurance coverage. The Company does not currently provide any form of credit
enhancement for any of its franchisees' operations.

    The franchise agreement requires the Company's express written agreement to
any transfer of a franchise or any sale of a controlling interest in a
franchisee. The agreement also authorizes the Company at any time to inspect and
monitor the franchisee's operations and audit its books and records. The Company
is entitled to terminate a franchise for a material breach of the terms of the
franchise agreement, subject to compliance with certain state laws regarding
termination for cause, prior notice and similar matters. During the year ended
January 31, 1999, the Company has terminated 24 franchise agreements and an
additional 20 franchise agreements have expired.

    AREA DEVELOPMENT AGREEMENTS. The Company has developed and executed area
development agreements which allow a franchisee the right to develop a
significant number of stores within a specified time period in specific
geographic locations.

COMPETITION AND TECHNOLOGICAL OBSOLESCENCE

      The Company competes with all forms of entertainment and leisure
activities including other local, regional and national video retail stores,
including the Blockbuster Entertainment division of Viacom, Inc.
("Blockbuster"), 


                                       9
<PAGE>   10
and with other video retailers offering prerecorded videocassettes. Some of the
Company's competitors have significantly greater financial and marketing
resources, market share and name recognition than the Company.

     The Company believes the principal competitive factors in the video retail
industry are store location and visibility, title selection, the number of
copies of popular titles available, customer service and convenience of store
access. The Company does not believe that pricing is a competitive factor
amongst video retailers, although it is a significant factor relative to
competition with other forms of entertainment. In addition, as a result of
direct competition with Blockbuster and a trend toward obtaining product via
revenue sharing agreements, rental pricing of videocassettes and greater
availability of new releases may become a more significant competitive factor in
the Company's business, which could have an adverse impact on the results of
operations of the Company. The Company is currently negotiating to obtain
similar copy depth via new revenue sharing agreements and other studio
purchasing programs which it believes will compensate for financial effects of
these programs by its competitors, however, there can be no assurance that such
agreements will be consummated.

     The Company competes with several delivery systems including cable,
satellite and pay-per-view cable television systems, to which subscribers pay a
fee to see a movie selected by the subscriber. Current pay-per-view services
offer a limited number of channels and movies and are only available to
households with a direct broadcast satellite (DBS) receiver or a cable converter
to unscramble incoming signals. Digital compression technology and other
developing technologies are enabling cable companies, direct broadcast satellite
companies, telephone companies and other telecommunications companies to
transmit a much greater number of movies to homes at more frequently scheduled
intervals throughout the day on demand. Select cable and other
telecommunications companies have tested "video on demand" service in some
markets. Video on demand service would allow a viewer to pause, rewind and fast
forward movies. Based upon published information, the Company believes these
tests have been unsuccessful. The Company also believes movie studios have a
significant interest in maintaining a viable movie rental business because the
sale of videocassettes to video retail stores represents the studios' largest
source of revenue. As a result, the Company believes movie studios will continue
to make movie titles available to cable television or other distribution
channels only after revenues have been derived from the sale of videocassettes
to video stores.

     The Company also believes substantial technological advances will need to
be developed in order to allow pay-per-view television to match the low price,
viewing convenience and selection available through video rental and substantial
capital expenditures will be necessary to implement these systems. In contrast,
according to Adams Media Research, 78.8 million, or 82%, of all U.S. television
households own a VCR. Currently, the Company does not believe that these
competitive technologies represent a near term competitive threat to its
business. However, technological advances or changes in the manner in which
movies are marketed, including the earlier release of movie titles to
pay-per-view, direct broadcast satellite, cable television or other distribution
channels, could make these technologies more attractive and economical, which
could have a material adverse effect on the business of the Company.

     Movies recorded on digital videodiscs ("DVD") were introduced in March of
1997, as a new product format with significant potential for the industry.
Because of the ease of use and durability of DVD, it is anticipated that
consumers will be receptive to the introduction of DVD as a new product format
for viewing movies and other products in home entertainment. Currently, the
Company offers DVD for rental and sale in approximately 60 stores in primarily
metropolitan markets. The Company expects to expand its DVD software
availability to other markets once the installed base will support such an
investment. In the near term, however, retail prices on DVD players are expected
to remain high, and the option to allow recordability to DVD, at a
consumer-level price point, is still several years away. In addition, only a
fraction of the titles available on video are available on DVD, and new releases
are typically available on videotape at an earlier date than on DVD. At this
date DVD has not yet attained universal support from movie studios.

EMPLOYEES

    At January 31, 1999, the Company had 2,277 employees, including 2,198 in
retail stores and the remainder in corporate administrative and warehousing
operations. Of such employees, 631 were full-time and 1,646 were part-time.
Staffing requirements for the Company's stores range from 6 to 12 employees,
depending on size and location, and typically include one store manager and one
or two assistant managers. Store managers report directly either to a 


                                       10
<PAGE>   11
Regional Vice President (of which the Company currently has ten) or, in regions
with many stores, to a district manager who, in turn, reports to a Regional Vice
President. The Company believes that its employee relations are good. None of
the Company's employees are represented by a labor union.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS. Certain statements in this Annual
Report on Form 10-K, under the captions "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere relate
to future events and expectations and as such constitute "forward-looking
statements." The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and in that
regard is cautioning the readers of this Report that the following important
factors, among others, could affect the Company's actual results of operations
and may cause changes in the Company's strategy with the result that the
Company's operations and results may differ materially from those expressed in
any forward looking statements made by, or on behalf of, the Company. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
following considerations, as well as those factors set forth under the caption
"Factors Affecting Future Results" in Item 7 below.

    The Company's growth could strain the Company's ability to manage
operations, integrate newly acquired stores into its systems and effectively
pursue its growth strategy. The Company competes with many others, including
Blockbuster, having significantly greater financial and marketing resources,
market share and name recognition than the Company. Further developments in
competing technologies could have a material adverse effect upon the video
retail industry and the Company's financial condition and results of operations.
Industry and Company revenues are somewhat seasonal and may be affected by many
factors, including variations in the acceptance of new release titles available
for rental and sale, the extent of marketing and promotional programs, weather,
special or unusual events and other factors that may affect retailers in
general. There can be no assurance that stores already acquired or acquired in
the future will perform as expected or that the prices paid for such stores will
prove to be advantageous. The Company's growth will be constrained by
limitations under its current capital structure.


ITEM 2.  PROPERTIES

    In January 1997, the Company moved into its new corporate headquarters,
located at One Summit Square, Suite 200, Route 413 & Double Woods Road,
Langhorne, Pennsylvania, which consists of approximately 17,600 square feet of
office space. This facility is rented under a lease which expires in April 2002.
The Company has one extension option for a five-year period and certain early
termination rights.

      The Company currently operates its distribution services in a 32,000
square foot warehouse facility located at 180 Wheeler Court, Suite B, in
Langhorne, Pennsylvania. This facility is rented under a lease that expires
August, 2000 (excluding renewals and extensions). The Company is currently
considering relocating this warehouse to a 12,000 square foot warehouse
currently under lease in Union, New Jersey.

    The Company also rents approximately 8,100 square feet of office space in
the aggregate for its regional operations in Union, New Jersey; Marion, Ohio;
and Vestal, New York, under leases which typically run for five or ten years
with options for renewal ranging from one to five years.

    The Company leases all of its video specialty stores. The leases for the
Company's stores generally have an initial term of five to ten years or more and
provide one or more options to renew for additional terms of similar lengths.
The leases with respect to the remaining stores generally have an initial term
of five years and provide one or two options to renew for an additional term of
three to five years. Rents for the renewal terms are typically at pre-negotiated
rates. The majority of the leases contain percentage rental provisions which
only apply based upon high thresholds of in-store gross sales revenues. The
Company has not to date paid material amounts of percentage rentals. The Company
is responsible for taxes, insurance and utilities under most leases.
The Company expects that future stores will also occupy leased premises.

                                       11
<PAGE>   12
ITEM 3.  LEGAL PROCEEDINGS

    The Company is involved in litigation in the ordinary course of its
business. The Company believes that the outcome of such litigation will not
materially affect the Company's financial position or results of operations.



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

None.


EXECUTIVE OFFICERS

    The executive officers and other key executives of the Company are as
follows:
<TABLE>
<CAPTION>
              NAME                        AGE                POSITION
              ----                        ---                --------
<S>                                       <C>    <C>
     Ralph W. Standley, III ............  60     Chairman of the Board of Directors
     T. Kyle Standley ..................  35     President, Chief Executive Officer and Director
     Richard G. Kelly ..................  45     Chief Financial Officer
     Jerry L. Misterman ................  53     Chief Accounting Officer and Executive Vice
                                                 President, Finance
     Donald Weiss ......................  57     Executive Vice President, Franchising
     M. Trent Standley .................  34     Vice President, Secretary and Director
</TABLE>

    Ralph W. Standley III has served as the Chairman of the Board of the Company
and its principal predecessors for the past five years. He also served as
President of two such predecessors, NVI and VDI, and as Secretary of two other
predecessors, GVI and GVMC, from the date of their inception or acquisition by
the Company through July 1995. Ralph W. Standley III is the father of T. Kyle
Standley and M. Trent Standley.

    T. Kyle Standley has served as the President and Chief Executive Officer and
a Director of the Company and its predecessors since its inception in February
1995. Previously, he served as an executive officer of two of the Company's
predecessors, GVC and GVMC, commencing in 1991. Mr. Standley was director of
research at Colliers International Property Consultants from 1989 to 1991, and
prior thereto was a financial analyst at Paine Webber Incorporated.

    Mr. Kelly joined the Company as Chief Financial Officer in July 1996. From
January 1994 to June 1996, Mr. Kelly was a shareholder and served as a Director
of Moore, Stephens, Reilly, PC and was a shareholder and Vice President of
Gerald T. Reilly & Co., Certified Public Accountants, Inc. Mr. Kelly served as
Director of Gillis & Kelly, P.C., from 1990 to 1993, at which time the firm
merged with Gerald T. Reilly & Co., Certified Public Accountants, Inc. Mr. Kelly
is a Certified Public Accountant whose responsibilities included direction of
mergers and acquisitions as well as tax and audit related functions.

    Mr. Weiss has served as Executive Vice President, Franchising of the Company
since September 1996. From May 1996 to August 1996, Mr. Weiss served as Vice
President-Franchise Development of the Company. From November of 1992 until
April 1996, he served as Vice President-Franchising Development of West Coast
Enterprises, Inc ("WCEI"). From August 1991 to October 1992, Mr. Weiss served as
Vice President-Franchising Development of WCEI, and from March 1989 to July
1991, he served as Executive Director of Franchise Development of WCEI.

    Mr. Misterman has served as Executive Vice President-Finance of the Company
since mid-July 1995 and as Chief Financial Officer of WC Franchise since the
acquisition by WC Franchise of certain franchise-related operating assets in
July 1995. Prior to July 1995, Mr. Misterman served as Chief Financial Officer
of each of the 


                                       12
<PAGE>   13
WCEI Companies, of Sorbee International, a manufacturer of sugar-free candies,
from March 1989, and of Medical Products Labs, a manufacturer and distributor of
fluoride-related sugar-free dental products, from March 1990. Prior to 1990, Mr.
Misterman's experience included serving as the Chief Financial Officer of the
Seven-Up Bottling Group of Philadelphia Inc., Corporate Controller and Assistant
Treasurer of Aydin Corporation, a manufacturer of electronic communications
systems and equipment, and also as Chief Financial Officer of Providers Benefit
Company, a manager and operator of several primary health care facilities and a
finance company.

    M. Trent Standley has served as a Vice President, Secretary and a Director
of the Company since May 1995. He also served as President of one of the
Company's predecessors, GVI, from 1989 to 1995, as Vice President of two other
predecessors, VDI from 1994 to 1995 and GVMC from 1992 to 1995, and as Secretary
of a fourth predecessor, NVI, from 1993 to 1995.


                                     PART II

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

    The Company's common stock is traded and quoted on the over the counter
Market under the symbol "WCEC". The following table shows the high and low sales
prices of the common stock for the last two fiscal years through January 31,
1999.
<TABLE>
<CAPTION>
                                                           COMMON
                                                         STOCK PRICE
                                                         -----------
                                                        HIGH      LOW
                                                        ----      ---
<S>                                                    <C>       <C>  
          Quarter ended April 30, 1997 ...........     $9.25     $5.50
          Quarter ended July 31, 1997 ............      6.00      3.25
          Quarter ended October 31, 1997 .........      3.75      1.63
          Quarter ended January 31, 1998 .........      2.31      1.00
          Quarter ended May 3, 1998 ..............      3.44      1.50
          Quarter ended August 2, 1998 ...........      2.62      1.12
          Quarter ended November 1, 1998 .........      1.56       .19
          Quarter ended January 31, 1999 .........      2.00       .27
</TABLE>

    As of April 22, 1999, there were 176 holders of record and approximately
1,345 beneficial owners of the Company's common stock. On such date,
approximately 9,275,212 shares were held by brokers, dealers and their nominees
on behalf of the beneficial owners.

DIVIDEND POLICY

    The Company has never declared or paid any cash dividends on its common
stock. For the foreseeable future, the Company expects to retain any earnings to
finance the development of its business. The payment of dividends is within the
discretion of the Company's Board of Directors and will depend on the earnings,
capital requirements, restrictions in future credit agreements and the operating
and financial condition of the Company, among other factors. The Company's
current bank credit facility contains a covenant prohibiting the payment of
dividends without the lender's consent. There can be no assurance that the
Company will ever pay dividends in the future.

RECENT SALES OF UNREGISTERED SECURITIES

    The Company did not make any issuances of unregistered securities during the
year ended January 31, 1999.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The selected historical financial data presented under the captions Statement of
Operations Data and Balance Sheet Data as of and for the years ended January 31,
1995, 1996, 1997, 1998, and 1999 was derived from the consolidated financial
statements of the Company. Such financial statements for the year ended January
31, 1999 were audited by BDO Seidman, LLP; financial statements for each of the
four years in the period ended January 31, 1998 were audited by
PricewaterhouseCoopers LLP. The Selected Financial Data set forth below should
be read in conjunction with the financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this filing.

                                       13
<PAGE>   14
<TABLE>
<CAPTION>
                                                                              YEARS ENDED JANUARY 31,
                                                                              -----------------------
                                                          1995           1996          1997             1998            1999
                                                          -----          ----          ----             ----             ----
                                                                       (in thousands, except per share data)
<S>                                                    <C>            <C>            <C>             <C>             <C>      
     STATEMENT OF OPERATIONS DATA:
       Revenues ..................................     $   6,503      $  14,719      $  73,293       $ 123,753       $ 120,174
       Operating income (loss)(1) ................           385          1,216          8,053             423         (21,170)
       Income (loss) before extraordinary item ...           204            334          3,710          (3,570)        (27,217)

       Net income (loss) .........................           204            334          3,466          (3,570)        (27,217)

       Income (loss) before extraordinary item per
        common share - basic and diluted .........     $    0.12      $    0.07      $    0.35       $   (0.26)      $   (1.93)
       Net income (loss) per common share
        basic and diluted ........................     $    0.12      $    0.07      $    0.33       $   (0.26)      $   (1.93)
        
       Weighted average number of common shares
        outstanding ..............................         1,693          4,756         10,554          13,817          14,072


     OPERATING DATA:
       Increase (decrease) in same store 
        revenues (2) .............................          14.2%           4.8%           5.3%            0.8%           (4.0)%
       Store Data:
          Company-owned stores at end of period ..            28             28            264             286             261
          Franchised stores at end of period .....            --            304            267             217             160
                                                       ---------      ---------      ---------       ---------       ---------
            Total stores at end of period ........            28            332            531             503             421

     BALANCE SHEET DATA:
       Cash and cash equivalents .................     $      45      $     611      $   1,311       $   2,604       $   2,424

       Videocassette rental inventory, net .......         1,464          1,509         24,598          32,005          20,375

       Total assets ..............................         3,631         16,515        159,964         187,236         161,680
       Long-term debt, less current portion ......           738          7,101         32,802          65,006          58,187

       Total liabilities .........................         3,266         15,972         52,829          83,555          89,424

       Equity ....................................           365            543        107,135         103,681          76,256
</TABLE>


--------

(1) Operating (loss) for the year ended January 31, 1999 is net of the effects
    of the valuation and store closing charges; described in Notes 2 and 17,
    respectively, to the consolidated financial statements.

(2) The increase (decrease) in same store revenues compares revenues from stores
    owned by the Company at the end of each period that were open throughout
    that period and the corresponding period for the prior year.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

    Through January 31, 1998, the Company had experienced rapid growth in
revenue, primarily as a result of acquiring video specialty store chains and had
also experienced increased growth in existing store revenues. After acquiring
the Videosmith(R) chain in 1994, the Company owned and operated 28 stores in
Ohio and Massachusetts. The acquisition of a total of 280 owned and operated
stores during the years ended January 31, 1997 and 1998 significantly increased
the Company's market penetration within New Jersey, New York, Pennsylvania, Ohio
and certain other states and expanded the Company's operations to reach a total
of 22 states.

    Revenues. Historically, the Company's revenues have been derived primarily
from the rental of videocassettes and video games together with sales of
previously viewed videocassettes ("rental revenues"), while lesser amounts have
been derived from payments from franchisees ("franchise fees") and sales of new
videocassettes, miscellaneous merchandise and other sales ("merchandise and
other sales"). Acquisitions of franchised stores and stores with differing
levels of merchandise and other sales compared with rental revenues have had,
and may in the future have, an effect on the Company's mix of revenue
components.

    The Company believes that convenience, selection, customer service and
weather are the most significant factors in determining rental volumes.
Significant increases in rental revenues largely depend upon the appeal of new
releases coming from motion picture producers and video game developers.
Management plans and executes various buying, marketing and operating strategies
so as to take maximum advantage of such competitive factors as are under its
control.


                                       14
<PAGE>   15
    The franchise arrangement calls for the Company to receive franchise fee
payments monthly in arrears from its franchised stores. The franchise fee
payment due from most domestic franchisees is equal to 7% of the aggregate
revenues from all of the franchisees' stores for the prior month, of which 2% of
such aggregate revenues is required to be devoted to paying marketing and
advertising costs.

    Merchandise and other sales are derived primarily from new videocassettes
sold directly to customers, sales of supplies to franchisees, video game sales
and the sale of confectionery and other movie-related merchandise.

    Expenses. Store operating expenses generally consist of expenses incurred at
the store level, including amortization of videocassette and video game rental
inventory ("rental inventory"), personnel expense, lease expense, utility
expense and depreciation. For purposes of this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," rental inventory
amortization expense has been removed from store operating expenses and
discussed separately. Rental inventory amortization expense is a substantial
component of total expenses. The Company believes that its methods of
amortization result in an appropriate matching of amortization expense with the
revenue received from the associated rental of such inventory.

    Cost of goods sold is a smaller component of total expenses consisting
primarily of costs associated with purchasing videocassettes and video games to
be sold directly to customers, supplies to be sold to franchisees, video games
and confectionery items. Selling, general and administrative expenses are
non-store level expenses and include general corporate expenses such as
marketing and advertising, personnel, administration, legal and accounting.
These functions are primarily performed at the Company's headquarters in
Langhorne, Pennsylvania. Interest expense reflects the extent to which the
Company borrows funds and the applicable rate at which such funds are borrowed.
Intangible assets are primarily comprised of franchise rights and goodwill.
Franchise rights are amortized on a straight-line basis over 15 years, the
estimated economic life of such rights. Goodwill is amortized over 20 years on a
straight-line basis.


                                       15
<PAGE>   16
RESULTS OF OPERATIONS

    The following table sets forth for the periods indicated statement of
operations data and other data expressed as a percentage of total revenue and
the number of stores open at the end of each period.
<TABLE>
<CAPTION>

                                                              YEARS ENDED JANUARY 31,
                                                                1997        1998      1999
                                                              ------      ------      -----
<S>                                                             <C>        <C>         <C>  
     STATEMENT OF OPERATIONS DATA:
       Revenues:
       Rental revenues ...................................      80.1%      82.4%       82.7%

       Merchandise and other sales .......................      13.4       15.6        15.5

       Franchise fees ....................................       6.5        2.0         1.8
                                                               -----      -----       -----

          Total revenues .................................     100.0      100.0       100.0
                                                               -----      -----       -----
       Costs and expenses:
       Store operating expenses(1) .......................      43.5       46.3        47.6
       Cost of goods sold ................................       8.9       11.0        11.9
       Amortization of videocassette and video game rental
          inventory(2) ...................................      15.4       21.0        20.5
       Selling, general and administrative ...............      16.7       12.2        13.0
       Amortization of intangible assets .................       4.6        5.0         5.4
       Store closing charges .............................        --         --         4.7
       Valuation charges .................................        --         --        14.5
       Debt offering write-off ...........................        --        4.2          --
            Total costs and expenses .....................      89.1       99.7       117.6
                                                               -----      -----       -----
       Income (loss) from operations .....................      10.9        0.3       (17.6)
       Interest expense and other ........................       1.5        4.0         5.8
                                                               -----      -----       -----

       Income (loss) before provision for income taxes and
     extraordinary .......................................       9.4       (3.7)      (23.5)
          item
       Provision (benefit) for income taxes ..............       4.4       (0.8)       (0.8)
                                                               -----      -----       -----

       Income (loss) before extraordinary item ...........       5.0%      (2.9)%     (22.6)%
                                                               =====      =====       =====

     OTHER DATA:
       Purchases of videocassette rental inventory .......      25.2%      24.6%       25.7%

     STORE DATA:
       Increase (decrease) in same store revenues(3) .....       5.3%       0.8%       (4.0)%
       Company-owned stores at end of period .............       264        286         261
       Franchised stores at end of period ................       267        217         160
                                                               -----      -----       -----
       Total stores at end of period .....................       531        503         421
                                                               =====      =====       =====
</TABLE>


----------

(1) Exclusive of amortization of rental inventory.

(2) The Company's amortization policy for rental inventory is described in Note
    2 to the Consolidated Financial Statements.

(3) The increase (decrease) in same store revenues compares revenues from stores
    owned by the Company at the end of each period that were open throughout
    that period and the for the prior year.



YEAR ENDED JANUARY 31, 1999 COMPARED TO YEAR ENDED JANUARY 31, 1998

     Revenues. Revenues decreased $3.5 million, or 2.8%, from $123.7 million for
the year ended January 31, 1998 to $120.2 million for the year ended January 31,
1999. This change reflected a decrease of $2.5 million in rental revenues, a
decrease of $0.7 million in merchandise sales and a decrease of $0.3 million in
franchise fee revenue. The decreases in store rental and merchandise sales
revenues of $3.2 million are attributable to a decrease in average store
revenues from $433,000 during the year ended January 31,1998 to $423,000 during
the year ended January 31, 1999 which accounted for approximately $2.8 million
of the decrease in store revenues. The 38 stores that the Company closed during
the year ended January 31, 1999 did not have a significant impact on store
revenues. On a weighted average store count basis, weighted average stores
decreased from 280 during the year ended January 31,1998 to 279 during the year
ended January 31, 1999. This decrease of 1 weighted average store accounts for
the remaining $0.4 million decrease in store revenues.

     Rental revenues decreased $2.5 million, or 2.5%, from $101.9 million for
the year ended January 31, 1998 to $99.4 million for the year ended January 31,
1999. This decrease is primarily attributable to lower average store rental
revenues per store. Average store rental revenues decreased by approximately
$8,000 per store which accounts for $2.2 million of the decrease. The remaining
$0.3 million relates to the weighted average store decrease 


                                       16
<PAGE>   17
of 1 store, as discussed above. The rental revenue decrease was caused by both
the impact of revenue sharing being used more extensively by the Company's
competitors which enables them to increase the number of copies of new release
movies carried in their stores and by the unusually dry and mild weather which
occurred during the year in the Company's geographic operating area.

     Merchandise and other sales decreased $0.7 million, or 3.6%, from $19.3
million for the year ended January 31, 1998 to $18.6 million for the year ended
January 31, 1999. This decrease is primarily attributable to lower average store
merchandise sales. Average merchandise sales decreased by approximately $2,200
per store which accounts for $0.6 million of the decrease. The remaining $0.1
million relates to the weighted average store decrease of 1 as discussed above.
Merchandise sales decreased as a result of lower store inventory levels during
the Company's fourth quarter of the year ended January 31, 1999. Average store
merchandise sales decreased by $6,600 for the quarter ended January 31, 1999 as
compared to the quarter ended January 31, 1998.

     Franchise fee revenues decreased $0.3 million, or 12.0%, from $2.5 million
for the year ended January 31, 1998 to $2.2 million for the year ended January
31, 1999. This decrease is attributable to a decline in the amount of royalty
payments received from franchisees due to both a decline in their business and a
decline in the number of franchisees who make required payments from 217 at
January 31, 1998 to 160 at January 31, 1999 and a decrease in the number of
franchise stores.

     Store Operating Expenses. Store operating expenses decreased $0.1 million,
or 0.2%, from $57.3 million for the year ended January 31, 1998 to $57.2 million
for the year ended January 31, 1999. This $0.1 million decrease in dollars is
primarily related to weighted average store decrease of 1 store as discussed
above. Average store operating expenses for both years ended January 31, 1998
and 1999 approximated $205,000. As a percentage of total revenues, store
operating expenses increased 1.3 percentage points from 46.3% for the year ended
January 31,1998 to 47.6% for the year ended January 31, 1999 primarily as a
result of lower store revenues as previously discussed.

     Cost of Goods Sold. Costs of goods sold increased $0.8 million, or 5.9 %,
from $13.6 million for the year ended January 31, 1998 to $14.4 million for the
year ended January 31, 1999. As a percentage of merchandising sales, cost of
goods sold increased by 4.8 percentage points from 70.5% for the year ended
January 31, 1998 to 75.3 % for the year ended January 31, 1999. These increases
in both dollars and as a percentage of merchandise sales were caused by the
impact of Titanic which represented a significant portion of the year's
merchandise sales and was sold at a lower margin as well as by restocking and
handling fees incurred during the year for merchandise inventory returned to
vendors.

     Amortization of Videocassette and Video Game Rental Inventory. Amortization
of rental inventory decreased $1.3 million, or 5.0 %, from $26.0 million for the
year ended January 31, 1998 to $24.7 million for the year ended January 31,
1999, primarily as a result of the change in method of amortization of rental
inventory as of November 1, 1998 as more fully discussed in Notes 2 and 3 of the
consolidated financial statements.

     Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $0.5 million, or 3.3%, from $15.1 million for
the year ended January 31, 1998 to $15.6 million for the year ended January 31,
1999. This increase was caused by increases in professional and consulting fees
of $0.8 million, depreciation of $0.7 million and recording of a $0.6 million
allowance for uncollectable franchise receivables which were mostly offset by
decreases in salaries of $0.5 million, travel of $0.2 million, insurance of $0.3
million, freight and postage of $0.3 million and supplies and computer expense
of $0.3 million. The increase in professional fees were caused by additional
legal expenses related to disputes with franchisees, negotiations with landlord
issues relating to store closures and delisting of the Company's stock by
Nasdaq. Decreases in selling, general and administrative expenses are the result
of cost cutting measures instituted by management. As a percentage of total
revenues, selling, general and administrative expenses increased 0.8 percentage
points from 12.2 % for the year ended January 31, 1998 to 13.0 % for the year
ended January 31, 1999 as a result of the $0.5 million increase of selling,
general and administrative expense as discussed above and the $3.5 million
decrease in total revenues as previously discussed.

     Store Closing Charges. During the quarter ended November 1, 1998, the
Company provided for $5.6 million in store closing costs associated with
management's decision to close stores as described in Note 17 to the
consolidated financial statements.



                                       17
<PAGE>   18
     Valuation Charges. During the fourth quarter ended January 31, 1999 the
Company recorded a valuation charge of approximately $17.4 million for
write-down of videocassette rental inventory and an impairment of goodwill as
more fully described in Note 2 to the consolidated financial statements.

     Amortization of Intangible Assts. Intangible amortization expense increased
$0.3 million, or 4.8 %, from $6.2 million for the year ended January 31, 1998 to
$6.5 million for the year ended January 31, 1999. As a percentage of total
revenues, intangible amortization increased 0.4 percentage points from 5.0 % for
the year ended January 31, 1998 to 5.4% for the year ended January 31, 1999.
These increases are entirely related to goodwill associated with acquisitions in
June 1997 which were only amortized for one-half of the year ended January 31,
1998, but were amortized for a full year during the year ended January 31, 1999.

      Interest Expense and Other. Net interest expense and other increased $2.0
million, or 40.0 %, from $5.0 million for the year ended January 31, 1998 to
$7.0 million for the year ended January 31, 1999. Interest expense comprises
almost all this net amount. As a percentage of total revenues, interest expense
increased 1.6 percentage points from 4.0 % for the year ended January 31, 1998
to 5.6 % for the year ended January 31, 1999. The increase is substantially
attributable to additional interest expense incurred in connection with
borrowings related to acquisitions in June 1997 for which interest expense was
incurred for one-half of the year ended January 31, 1998, but for a full year
during the year ended January 31, 1999.

     Net Income (Loss). As a result of the foregoing, net income decreased $23.6
million, from a $3.6 million net loss for the year ended January 31, 1998 to a
$27.2 million net loss for the year ended January 31, 1999. Without the store
closing charges of $5.6 million and $17.4 million of valuation charges, the loss
for the year would have been $4.2 million.


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

     Revenues. Revenues increased $50.4 million, or 68.8%, from $73.3 million
for the year ended January 31, 1997 to $123.7 million for the year ended January
31, 1998. This change reflected an increase of $43.2 million in rental revenues,
an increase of $9.5 million in merchandise sales and a decrease of $2.3 million
in franchise fee revenue. The increases in rental and merchandise sales revenues
are partially attributable to the 40 video specialty stores acquired in 1997
which were not included in revenue for the year ended January 31, 1997 but were
included for part of the year ended January 31, 1998 (1 on March 21, 1997, 1 on
April 10, 1997, 37 on June 16, 1997 and 1 on June 24, 1997) and partially
attributable to the timing of acquisitions of stores for the year ended January
31, 1997: 172 stores acquired on May 17, 1996 were included in revenues for only
eight and one-half months in the year ended January 31, 1997, but for the full
year ended January 31, 1998; 5 stores acquired on August 26, 1996 were included
in revenues for only five months in the year ended January 31, 1997 but for all
twelve months in the year ended January 31, 1998; 15 stores acquired between
September 30 and October 1, 1997 were included in revenues for only four months
in the year ended January 31, 1997, but for all 12 months of the year ended
January 31,1998; and 45 stores acquired on November 15, 1996 were included in
revenues for only two and one-half months in the year ended January 31, 1997,
but for the full year ended January 31,1998. Three other store acquisitions
complete the Company's acquisition of 280 stores since the Offering: 1 on
October 25, 1996; 1 on December 1, 1996 and 1 on December 3, 1996. Revenues for
these three stores were included for only three, two, and two months,
respectively, for the year ended January 31, 1997, as compared to all twelve
months of the year ended January 31,1998 The remaining increase is due to the
increase in per store average revenues.

     Rental revenues increased $43.2 million, or 73.6%, from $58.7 million for
the year ended January 31, 1997 to $101.9 million for the year ended January 31,
1998. This increase is primarily attributable to the revenues generated by the
40 video specialty stores acquired in the year ended January 31, 1998 and
revenues from stores acquired during and owned for only a portion of the year
ended January 31, 1997 but owned for the full year ended January 31, 1998 as
described above. The remaining increase in rental revenues is due to an increase
in rental revenues for stores owned by the Company for the full twelve months in
both of the years ended January 31, 1998 and 1997.

     Merchandise and other sales increased $9.5 million, or 96.9 %, from $9.8
million for the year ended January 31, 1997 to $19.3 million for the year ended
January 31, 1998 primarily attributable to the merchandise sales contributed by
the 40 video specialty stores purchased in the year ended January 31, 1998 and
the merchandise sales from stores owned for only a portion of the year ended
January 31, 1997 but for the full year ended January 31, 1998 


                                       18
<PAGE>   19
as described above. In addition, the Company has expanded its inventory levels
to increase sales of new movies.

     Franchise fee revenues decreased $2.3 million, or 47.9%, from $4.8 million
for the year ended January 31, 1997 to $2.5 million for the year ended January
31, 1998. Approximately $0.7 million of this decrease is the net effect of the
acquisition of 39 franchised stores among the total of 280 stores purchased by
the Company since May 17, 1996. The remaining $1.6 million decrease is
attributable to the closing or termination of franchised stores, many of which
did not meet image and appearance criteria, a decline in the number of royalty
payments received from franchisees due to a decline in their business and a
decline in the number of franchisees who make required payments since January
31, 1997.

       As a result of the Company's acquisition activities and other
developments described above the mix of revenue sources changed to approximately
82.4% rental, 15.6% merchandising and 2.0% franchising during the year ended
January 31, 1998 from approximately 80.1%, 13.4%, and 6.5%, respectively, during
the year ended January 31, 1997.

        Store Operating Expenses. Store operating expenses increased $25.4
million, or 79.6%, from $31.9 million for the year ended January 31, 1997 to
$57.3 million for the year ended January 31, 1998. This $25.4 million increase
in dollars is primarily related to the acquisition of new stores as described
above. As a percentage of total revenues, store operating expenses increased 2.8
percentage points from 43.5% for the year ended January 31, 1997 to 46.3% for
the year ended January 31, 1998. Except as discussed below this increase was
caused by the decrease from the year ended January 31, 1997 to the year ended
January 31, 1998 in the relative significance of the Company's franchise
operations (as measured by the decrease in franchise revenues as a percentage of
total revenues), since the franchise business involves virtually no store
operating expenses. As a percentage of rental revenues and merchandise sales,
store operating costs increased 0.7 percentage points from 46.6% for the year
ended January 31, 1997 to 47.3% for the year ended January 31, 1998. This
increase is primarily due to higher rent costs and payroll costs. Since the
initial acquisition of 172 stores on May 17, 1996, most of the additional 108
stores acquired are located in larger metropolitan areas which generally have
higher occupancy costs. Store salaries increased due to an increase in store man
hours. In September 1997, management implemented steps to begin to reverse this
trend in man hours and during the fourth quarter ended January 31, 1998, store
payroll costs were substantially less than management's goals.

       Cost of Goods Sold. Costs of goods sold increased $7.1 million, or
109.2%, from $6.5 million for the year ended January 31, 1997 to $13.6 million
for the year ended January 31, 1998, primarily as a result of an increase in
merchandising sales volume due to the acquisition of the 280 video specialty
stores since May 17, 1996. As a percentage of merchandising sales, cost of goods
sold increased by 4.2 percentage points from 66.3% for the year ended January
31, 1997 to 70.5% for the year ended January 31, 1998. This increase was
primarily due to a change in sales mix caused by the acquisition of the 280
video specialty stores and the sale of more sell-through titles which have a
lower margin.

        Amortization of Videocassette and Video Game Rental Inventory.
Amortization of rental inventory increased $14.7 million, or 130.1%, from $11.3
million for the year ended January 31, 1997 to $26.0 million for the year ended
January 31, 1998, primarily as a result of the acquisition of the 280 video
specialty stores since May 17, 1996. As a percentage of rental revenues this
amortization increased 6.2 percentage points from 19.3% for the year ended
January 31, 1997 to 25.5% for the year ended January 31, 1998. This is primarily
due to the net effects of purchase accounting for acquired stores and by an
$803,000 charge resulting from the adoption of the new method of amortization of
rental inventory as described in Notes 2 and 3 to the Consolidated Financial
Statements.

         Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $2.9 million, or 23.8%, from $12.2 million for
the year ended January 31, 1997 to $15.1 million for the year ended January 31,
1998. The increase is primarily related to an increase in Corporate personnel
hired in anticipation of the Proposed Private Placement (see " ---- Debt
Offering Write-Off") and related acquisitions. Because of the indefinite delay
in the Company's Proposed Private Placement of debt securities and related
acquisitions, the Company has sharply reduced its general and administrative
costs from the levels reached in contemplation of expansion. The effects of
these changes were partially reflected in the financial results of the fourth
quarter of the year ended January 31, 1998. As a percentage of total revenues,
however, general and administrative expenses decreased 4.5 percentage points
from 16.7% for the year ended January 31, 1997 to 12.2% for the year ended
January 31, 1998 


                                       19
<PAGE>   20
primarily reflecting the ability of the Company's administrative staff to
operate an increasing number of corporate stores and, to a lesser extent, the
change in the mix of rental revenues, merchandise sales and franchise fees.
Franchising has higher associated general and administrative costs than rental
revenues and merchandise sales.

         Amortization of Intangible Assts. Intangible amortization expense
increased $2.8 million, or 82.4%, from $3.4 million for the year ended January
31, 1997 to $6.2 million for the year ended January 31, 1998. As a percentage of
total revenues, intangible amortization increased 0.4 percentage points from
4.6% for the year ended January 31, 1997 to 5.0% for the year ended January 31,
1998. These increases are entirely related to amortization of goodwill
associated with the acquisition of 280 video specialty stores since May 17,
1996.

           Debt Offering Write-Off. A debt offering write-off of $5.1 million
was incurred for the year ended January 31, 1998. The entire $5.1 million
represents expense associated with the Proposed Private Placement and related
acquisitions due to the Company's decision to indefinitely delay such offering.

           Interest Expense and Other. Net interest expense and other increased
$3.9 million, or 354.5%, from $1.1 million for the year ended January 31, 1997
to $5.0 million for the year ended January 31, 1998. Interest expense comprises
almost all this net amount. As a percentage of total revenues, interest expense
increased 2.2 percentage points from 1.8% for the year ended January 31, 1997 to
4.0% for the year ended January 31, 1998. The increase is substantially
attributable to additional interest expense incurred in connection with
borrowings related to the acquisitions.

          Extraordinary Item. For the year ended January 31, 1998 no
extraordinary items were incurred. For the year ended January 31, 1997 the
Company incurred an extraordinary item of $0.4 million ($0.2 million net of
taxes) in conjunction with the early extinguishment of a portion of the
previously outstanding subordinated debt. The Company was required by terms of
the debt agreement to pay a prepayment penalty of $0.4 million upon completion
of the Offering.

          Net Income (Loss). As a result of the foregoing, net income decreased
$7.1 million, from $3.5 million of net income for the year ended January 31,
1997 to a $3.6 million net loss for the year ended January 31, 1998. Carving out
the one-time charge of $5.1 million resulting from the Debt Offering Write-Off
and adjusting for the $0.8 million charge resulting from a change in method of
amortization of the video rental inventory (see Note 2 to the Consolidated
Financial Statements), the loss for the year would have been eliminated.


LIQUIDITY AND CAPITAL RESOURCES

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 7 to the
consolidated financial statements, the Company has approximately $58.1 million
of its debt maturing February 15, 2000.

Although the Company believes that its projected cash flow will be sufficient to
meet its operating needs until the debt maturity date discussed above, there can
be no assurances beyond that date.

While the Company is continuing to monitor and reduce its operating expenses,
including payroll, it is also considering the sale of certain assets or
operations as well as exploring other alternatives, including, but not limited
to a merger or refinancing.

For the year ended January 31, 1999, the Company had net cash provided by
operating activities of $33.5 million, net cash used in investing activities of
$34.8 million (consisting primarily of cash used to purchase videocassette
rental inventory of $31.0 million and $3.4 million of cash paid for purchases of
property and equipment) and net cash provided by financing activities of $1.1
million (consisting primarily of net borrowings under the Credit Facility, as
described in Note 7 to the Consolidated Financial Statements), resulting in a
net decrease in cash of $0.2 million.

During the current fiscal year, the Company has financed its operations and
capital expenditures primarily through available operating cash flow .

                                       20
<PAGE>   21
On January 12, 1999, the Company signed an amendment to its bank agreement
increasing the availability under the facility from $65,000,000 to $70,000,000,
as well as providing for certain credit enhancements. The amended credit
agreement is a non-revolving facility maturing February 15, 2000. The bank
agreement includes covenants, including, but not limited to, minimum operating
cash flow, minimum net worth, dividend restrictions, and limitations on
indebtedness. The facility is secured by substantially all of the Company's
assets.

In the event the debt is not repaid in full, subject to certain conditions,
prior to September 30, 1999, the banks have the right under a warrant agreement
to purchase 5% of the Company's common stock at 75% of the average market price
15 days prior to July 1, 1999.

On October 7, 1998, the Company received formal notice from NASDAQ that its
stock would no longer be eligible to be traded through the NASDAQ National
Market, due to the Company's inability to meet the NASDAQ requirement to
maintain $4 million of tangible net worth and a $1.00 bid price, or in the
alternative a $5.00 bid price and sales of $50 million. Currently the Company
stock is trading on the OTC Bulletin Board.

During the third quarter of fiscal 1999, the Company implemented a plan to close
certain under-performing stores, for which it recorded a charge of $5.6 million.
In addition, the Company executed an expense reduction program, which when
combined with the aforementioned store closures, is expected to result in a
savings of $4 million annually.

The Year 2000 Issue and Capital Commitments. The year 2000 problem is the result
of computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. As a result, the computerized systems (including both information
and non-information technology systems) and applications used by the Company are
being reviewed, evaluated, and, if and where necessary, modified or replaced to
ensure that all financial, information, and operating systems are Year 2000
compliant.

The Company intends to upgrade its POS systems over the upcoming months in an
effort to make more detailed data available on a system wide basis in a timely
manner at a cost of approximately $0.6 million. Such costs will be capitalized
and amortized over the useful life of the new software. The Company believes
that with modifications to existing software and conversions to the new POS
system, the year 2000 issue will not pose significant operational problems for
the Company's computer systems. The Company has initiated formal communications
with its suppliers to determine the extent to which the Company is vulnerable to
those third parties' failure to remedy their own Year 2000 issues. The Company
will continue to address any further year 2000 issues and believes that any
costs relating to such issues will not be material to the Company's financial
condition or results of operations. Subject to the availability of funds under
the Credit Facility and its' ability to secure additional financing the
Company's capital expenditure plan provides for conversion of the stores
acquired in various prior acquisitions to West Coast Video(R) signage and format
and installing certain West Coast layout and features at an estimated cost of
$32,000 per store; the Company also has plans to relocate and open up to 50
stores. Build-out costs for relocated stores are expected to range from $30,000
to $225,000 per store. The Company's expansion plans are subject to the
availability of funds under the Credit Facility.

Rental inventories are treated as noncurrent assets under generally accepted
accounting principles because they are not assets which are reasonably expected
to be completely realized in cash or sold in the normal business cycle. Although
the rental of this inventory generates the major portion of the Company's
revenue, the classification of these assets as noncurrent results in their
exclusion from working capital. The aggregate amount payable for this inventory,
however, is reported as a current liability until paid and, accordingly, is
included in the computation of working capital. Consequently, the Company
believes working capital is not an appropriate measure of its liquidity.

Recent Accounting Pronouncements

                                       21
<PAGE>   22
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments"
("SFAS 133") which establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair market value. Under certain circumstances, a portion of the
derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
Presently, the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly, the Company believes that the
adoption of SFAS 133 will have no impact on its financial position or results of
operations.

In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities" which
provides guidance on the financial reporting of start-up costs and organization
costs. SOP 98-5 requires that an entity expense costs of start-up activities and
organization costs as incurred. Presently, the Company capitalizes these costs
and amortizes them during the year in which they are incurred. The Company
believes that the adoption of SOP 98-5 will not have a material impact on its
financial position or results of operations.


GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS AND SEASONALITY

    The Company's results of operations are generally affected by economic
trends in its market area but, results to date have not been impacted by
inflation or wage increases.

    A concentration of new store openings and the related pre-opening costs in
any particular fiscal quarter could have an adverse impact on the financial
results for that quarter, leading to fluctuating quarterly financial results,
which could adversely impact the Company's common stock price.

    The videocassette and interactive electronic entertainment products rental
business is somewhat seasonal, with revenues in early Spring generally being
lower due in part to the change to Daylight Savings Time and improved weather,
and revenues in early Fall generally being lower due in part to the start of
school, the football season, alternative leisure time activity, and the new
television season.

FACTORS AFFECTING FUTURE RESULTS

    The future operating results of the Company remain difficult to predict. The
Company continues to face many risks and uncertainties which could affect its
operating results, including, without limitation, those described below.

The video retail industry is highly competitive. The Company competes with other
video specialty stores, including stores operated by regional and national
chains, as well as other businesses, such as supermarkets, pharmacies,
convenience stores, bookstores, mass merchants, mail order operations and other
retailers, that offer videocassettes and interactive electronic entertainment
products. Many of the Company's stores compete with stores operated by
Blockbuster, the dominant video specialty retailer in the United States.
Blockbuster and certain of the Company's other competitors have significantly
greater financial and marketing resources, market share and name recognition
than the Company. In addition, the Company's stores compete with other
leisure-time activities, including movie theaters, network and cable television,
direct broadcast satellite television, live theater, sporting events, family
entertainment centers and Internet-related activities. The Company's failure to
compete effectively would have a material adverse effect on its financial
condition and results of operations.
See "Item 1 -- Competition."

    The Company competes with pay-per-view cable television systems
("Pay-Per-View"), to which cable television subscribers pay a fee to see a movie
or other program selected by the subscriber. Existing Pay-Per-View services
offer a limited number of channels and programs and are generally available only
to households with a converter to unscramble incoming signals. Recently
developed technologies, however, permit certain cable companies, direct
broadcast satellite companies, telephone companies and other telecommunications
companies to transmit a much greater number of movies to homes in more markets
as frequently as every five minutes. Ultimately, further improvements in these
technologies or the development of other similar technologies could lead to the
availability of 


                                       22
<PAGE>   23
a broad selection of movies to consumers on demand, which could have a material
adverse effect on the Company's financial condition and results of operations.
See "Item 1 -- Competition." Changes in the manner in which movies are marketed
by movie studios, including an earlier release by movie studios of movie titles
to cable television or other distribution channels, could substantially decrease
the demand for video rentals, which could have a material adverse effect on the
Company's financial condition and results of operations. See "Item 1 -- Video
Industry Overview" and "-- Competition."

    Rental and sales volumes for video games have fluctuated considerably in
recent fiscal periods, both industry-wide and for the Company, as a result of
technological changes and the introduction (or delay in introduction) of new
products. Similar fluctuations may occur in future periods. Revenues from the
videocassette and video game rental portions of the Company's business are
somewhat seasonal and may be affected by many factors, including variations in
the number and timing of theatrical movie releases and releases to video
specialty stores, the public acceptance of new release titles available for
rental and sale, the extent of marketing and promotional programs sponsored by
distributors of videocassettes and video games and changes in wholesale prices
of videocassettes and Pay-Per-View formatted movies. Demand for the Company's
products may also be affected by weather, special or unusual events and other
factors that may affect retailers in general.

    On January 31, 1999, the Company had 104 franchisees operating 160
franchised stores. No assurance can be given that the Company will operate its
franchise operations at profitable levels or continue to market and sell new
franchises. In addition, no assurance can be given that desirable locations and
acceptable leases can be obtained for new franchisees. The Company monitors
franchisees' revenue reporting and compliance with ongoing obligations on the
basis of monthly revenue and ordered inventory reports. The Company's standard
franchise agreement generally also grants the Company the right to inspect the
franchised store and the right to audit the books and records of franchisees at
any time. No assurance can be given, however, that all franchisees will operate
their stores in accordance with the Company's operating guidelines and in
compliance with all material provisions of the franchise agreement, and the
failure of franchisees to so operate their stores could have a material adverse
effect on the Company's business. The Company has recently experienced a
significant reduction and slowdown in franchise fee receipts.

    The Company's recent rapid growth challenges the Company's ability to manage
operations, integrate newly acquired stores into its systems and effectively
pursue its growth strategy. The success of the Company's growth strategy is
dependent upon its ability to achieve cost savings in connection with
acquisitions and otherwise successfully integrate acquired operations into the
Company's management information, telecommunications, management, marketing,
finance and accounting, entertainment purchasing, distribution, retail
operations and merchandising systems. There can be no assurance, however, that
the Company will be able to achieve such savings or successfully integrate
acquired operations into its existing operations. There can be no assurance that
such acquisitions will not have a material adverse effect upon the Company's
operating results while the operations of the acquired businesses are being
integrated into the Company's. Once integrated, acquired operations may not
achieve levels of revenues or profitability comparable to those achieved by the
Company's existing operations or otherwise perform as expected. Future expansion
will require the Company's existing management personnel to, among other things,
identify and analyze new markets and new site locations; locate and negotiate
with numerous potential acquirees; consummate acquisitions; negotiate acceptable
real estate leases and related agreements for existing stores and for stores to
be acquired or opened and to develop cost-effective transition plans for
acquired stores; hire, train and assimilate store managers and other store
personnel; and address the other specific risks described in more detail below.

    In consummating acquisitions, the Company has relied upon certain
representations, warranties and indemnities made by the sellers with respect to
each of the acquisitions, as well as its own due diligence investigation. There
can be no assurance that such representations and warranties will be true and
correct, that the Company's due diligence will uncover all material adverse
facts relating to the operations and financial condition of the stores acquired
or that all of the conditions to the Company's obligations to consummate
acquisitions will be satisfied. Any material misrepresentations could have a
material adverse effect on the Company's financial condition and results of
operations.

    The Company intends to finance new store openings primarily from borrowings
under the Credit Facility, from the net proceeds from the sale of other debt or
equity securities, and from cash from operations. At present, the 


                                       23
<PAGE>   24
Credit Facility contains provisions which may place substantial limitations on
the availability of funds which, in turn, may impact future growth. See Note 7
to the Consolidated Financial Statements. There can be no assurance that the
Company will at some future date be able to sell debt or equity securities on
reasonable terms. Continued inability to raise sufficient cash and issue
sufficient stock could inhibit implementation of the Company's long-term growth
strategy.

    In addition, the Company is subject to the Federal Trade Commission's Trade
Regulation Rule entitled "Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures" (the "FTC Franchise Rule") and
state laws and regulations that govern the offer and sale of franchises. In
order to offer and sell franchises, the Company is required by the FTC Franchise
Rule to furnish each prospective franchisee a current franchise offering
circular prior to the sale of a franchise. Furthermore, 12 states at present
require a franchisor to comply with registration or filing requirements prior to
offering a franchise in the state and to provide a prospective franchisee with a
current franchise offering circular complying with the state's laws, prior to
the sale of the franchise, and six other states require written notice prior to
the offer of a franchise (collectively, the "Registration States"). The Company
is currently registered in all of the Registration States and is currently
entitled to sell franchises in all other states in compliance with the FTC
Franchise Rule. The Company is in the process of filing all of its renewal
registrations in the Registration States, to reflect its latest franchise
offering. Violations of the FTC Franchise Rule and the franchise offering
requirements of the Registration States could result in civil penalties against
the Company and civil and criminal penalties against the executive officers of
the Company.

    The inability by the Company to be able to obtain revenue sharing agreements
from major studios at the same time as Blockbuster, its principal competitor,
has had and may continue to have significant negative impact on rental revenues
and cash flow. In addition, the cost of revenue sharing agreements with major
studios may have an adverse impact on gross income and cash flow.

ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

    The Company's exposure to market risk relates primarily to potential changes
in interest rates on the Company's long-term debt obligations. The Company has
cash flow exposure on its long-term obligations related to changes in market
interest rates. The Company enters into long-term debt obligations for general
corporate purposes, including the funding of capital expenditures for
acquisitions. The Company has not entered into any material derivative financial
instruments to hedge interest rate risk on these general corporate borrowings.

    The Company's management believes that fluctuations in interest rates in the
near term may materially affect the Company's consolidated operating results,
financial position or cash flows as the Company has significant exposure to
interest rate fluctuations.

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The consolidated Financial Statements of West Coast Entertainment
Corporation, listed in the index appearing under Item 14(a)(1) and (2) are filed
as part of the Annual Report on Form 10-K.


                                       24
<PAGE>   25
                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
West Coast Entertainment Corporation

We have audited the accompanying consolidated balance sheet of West Coast
Entertainment Corporation and subsidiaries as of January 31, 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based upon our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of West Coast
Entertainment Corporation and its subsidiaries as of January 31, 1999 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has approximately $58.1 million
of its Credit Facility maturing February 15, 2000 which raises substantial doubt
about its ability to continue as a going concern beyond that date. Management's
plans, including strategic financial alternatives, in regard to this matter are
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

BDO SEIDMAN, LLP

/s/ BDO Seidman, LLP

Philadelphia, PA

April 23, 1999



                                       25
<PAGE>   26
                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
West Coast Entertainment Corporation

     In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of West Coast
Entertainment Corporation and its subsidiaries (the "Company") at January 31,
1998, and the results of their operations and their cash flows for each of the
two years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

    As discussed in Note 2 to the consolidated financial statements, effective
August 1, 1997, the Company changed its method of accounting for the
amortization of its videocassette rental inventory.

PRICEWATERHOUSECOOPERS LLP

/s/ PricewaterhouseCoopers LLP

April 2, 1998
Boston, Massachusetts



                                       26
<PAGE>   27
                      WEST COAST ENTERTAINMENT CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
                                                                                                         JANUARY 31,
                                                                                                         -----------
                                                                                                   1998           1999
                                                                                                 ---------      ---------
<S>                                                                                              <C>            <C>      
                              ASSETS (NOTE 7)                       
     Current assets:
       Cash ................................................................................     $   2,604      $   2,424

       Accounts receivable and other receivables (net of allowance for doubtful
         accounts of $123 and $ 67 at January 31, 1998 and 1999, respectively) .............         1,629          1,512
       Merchandise inventory ...............................................................         8,216          8,404
       Income taxes receivable .............................................................           441             --
       Deferred tax asset (Note 8) .........................................................           820             --
       Market development funds and co-op receivable .......................................         2,124          1,242
       Receivables from officers (Note 9) ..................................................           341            373
       Prepaid expenses and other current assets ...........................................           652            472
                                                                                                 ---------      ---------
        Total current assets ...............................................................        16,827         14,427

     Videocassette rental inventory, (net of accumulated amortization of $37,252 and
       $67,610 at January 31, 1998 and 1999, respectively) (Note 3) ........................        32,005         20,375
     Furnishings, equipment and leasehold improvements, net (Note 4) .......................        18,953         17,892
     Intangible assets (net of accumulated amortization of $10,003 and $ 16,497 at
       January 31, 1998 and 1999, respectively) ............................................       117,047        110,530
     Other assets (Note 5) .................................................................         2,404          2,456
                                                                                                 ---------      ---------

          Total assets .....................................................................     $ 187,236      $ 165,680
                                                                                                 =========      =========

                    LIABILITIES AND STOCKHOLDERS' EQUITY
     Current liabilities:
       Current portion of long-term debt (Note 7) ..........................................     $       8      $   8,081
       Accounts payable ....................................................................        11,719         14,659
       Accrued expenses (Note 6) ...........................................................         4,926          7,783
       Income taxes payable ................................................................            --            655
                                                                                                 ---------      ---------
          Total current liabilities ........................................................        16,653         31,178

     Long-term debt (Note 7) ...............................................................        65,006         58,187
     Deferred tax liability (Note 8) .......................................................         1,741             --
     Other Liabilities .....................................................................           155             59
                                                                                                 ---------      ---------

     Total Liabilities .....................................................................        83,555         89,424
                                                                                                 ---------      ---------
     Commitments and contingencies (Notes 14 and 15) .......................................            --             --

     Stockholders' equity:
        Common stock ($0.01 par value; 13,843 shares as of  January 31, 1998, of which
          13,706 shares were outstanding and 137 shares were to be issued and  14,185 shares         
          as of January 31, 1999 of which 14,073 shares were outstanding and 20 
          shares were to be issued (Note 11) ...............................................           138            142
        Preferred stock ($0.01 par value, 2,000 shares authorized, no shares
          issued) (Note 13) ................................................................            --             --
        Additional paid-in capital .........................................................       104,063        104,093
        Accumulated (deficit) ..............................................................          (520)       (27,737)
        Treasury stock (92 shares of common stock, at cost) ................................            --           (242)
                                                                                                 ---------      ---------
          Total stockholders' equity .......................................................       103,681         76,256
                                                                                                 ---------      ---------
          Total liabilities and stockholders' equity .......................................     $ 187,236      $ 165,680
                                                                                                 =========      =========
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                       27
<PAGE>   28
                      WEST COAST ENTERTAINMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                        YEARS ENDED JANUARY 31,
                                                                ---------------------------------------
                                                                   1997           1998          1999
                                                                ---------      ---------      ---------
<S>                                                             <C>            <C>            <C>      
     Revenues:
       Rental revenue .....................................     $  58,728      $ 101,934      $  99,379
       Merchandise sales ..................................         9,795         19,312         18,626
       Franchise fees .....................................         4,770          2,507          2,169
                                                                ---------      ---------      ---------
                                                                   73,293        123,753        120,174
                                                                ---------      ---------      ---------
     Costs and expenses:
       Store operating expenses ...........................        31,912         57,346         57,207
       Cost of goods sold .................................         6,527         13,596         14,414
       Amortization of videocassette and video game rental
          inventory (Note 3 ) .............................        11,265         25,959         24,636
       Selling, general and administrative ................        12,116         15,065         15,599
       Amortization of intangible assets ..................         3,420          6,239          6,493
       Store closing charges (Note 17) ....................            --             --          5,557
       Valuation charges (Note 2) .........................            --             --         17,438
       Debt offering write-off (Note 16 ) .................            --          5,125             --
                                                                ---------      ---------      ---------
                                                                   65,240        123,330        141,344
                                                                ---------      ---------      ---------
     Income (loss) from operations ........................         8,053            423        (21,170)
     Interest expense .....................................         1,294          4,927          6,674
     Other expense (income) ...............................          (178)           128            345
                                                                ---------      ---------      ---------
     Income (loss) before provision (benefit) for income
     taxes and extraordinary item .........................         6,937         (4,632)       (28,189)
     Provision (benefit) for income taxes .................         3,227         (1,062)          (972)
                                                                ---------      ---------      ---------
     Income (loss) before extraordinary item ..............         3,710         (3,570)       (27,217)
     Extraordinary item (net of income tax benefit of $156)           244             --             --
                                                                ---------      ---------      ---------
     Net income (loss) ....................................     $   3,466      $  (3,570)     $ (27,217)
                                                                =========      =========      =========
     Income (loss) per common share data:
       Income (loss) before extraordinary item - basic and
         diluted ..........................................     $     .35      $    (.26)     $   (1.93)

       Extraordinary item (net of tax) - basic and diluted           (.02)            --             --
                                                                ---------      ---------      ---------
       Net income (loss) - basic and diluted ..............     $     .33      $    (.26)     $   (1.93)
                                                                =========      =========      =========
     Weighted average number of common shares outstanding .        10,554         13,817         14,072
                                                                =========      =========      =========
</TABLE>


               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                       28
<PAGE>   29
                      WEST COAST ENTERTAINMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                          YEARS ENDED JANUARY 31,
                                                                      1997          1998           1999
                                                                  ---------      ---------      --------- 
<S>                                                               <C>            <C>            <C>       
     Cash flows from operating activities:
       Net income (loss) ....................................     $   3,466      $  (3,570)     $ (27,217)
       Adjustments to reconcile net income (loss) to cash
          flows provided by operating activities:
          Amortization of debt financing costs ..............           128            224            670
          Amortization of videocassette rental inventory ....        11,265         25,959         24,636
          Depreciation and amortization of furnishings,
             equipment and leasehold improvements ...........           898          2,471          3,300
          Amortization of intangible assets .................         3,420          6,239          6,493
          Deferred taxes ....................................           686            456            921
          Store closing charges .............................            --             --          2,321
          Valuation charges .................................            --             --         17,438
          Changes in assets and liabilities:
          Accounts receivable ...............................          (294)           270            812
          Merchandise inventory .............................        (2,992)        (1,447)          (238)
          Prepaid expenses and other assets .................        (2,597)          (792)          (328)
          Accounts payable ..................................         5,415         (1,222)         2,690
          Accrued expenses and other liabilities ............          (757)           135          2,948
           Income taxes payable .............................           795         (1,996)          (934)
                                                                  ---------      ---------      --------- 
          Net cash provided by operating activities .........        19,433         26,727         33,512
                                                                  ---------      ---------      --------- 
     Cash flows related to investing activities:
       Acquisition of businesses, net of cash acquired ......       (80,453)       (19,301)          (553)
       Purchases of property and equipment ..................        (3,141)        (7,306)        (3,359)
       Purchases of videocassette rental inventory ..........       (18,469)       (30,449)       (30,906)
                                                                  ---------      ---------      --------- 
            Net cash used in investing activities ...........      (102,063)       (57,056)       (34,818)
                                                                  ---------      ---------      --------- 
     Cash flows related to financing activities:
       Proceeds from long-term debt .........................        33,600         32,200          1,100
       Repayments of long-term debt .........................       (10,200)            (7)            (7)
       Proceeds from issuance of common stock ...............        60,832            116             33
       Change in other assets related to debt financing costs          (902)          (687)            --
                                                                  ---------      ---------      --------- 
     Net cash provided by financing activities ..............        83,330         31,622          1,126
                                                                  ---------      ---------      --------- 
     Net increase (decrease) in cash ........................           700          1,293           (180)
     Cash, beginning of period ..............................           611          1,311          2,604
                                                                  ---------      ---------      --------- 
     Cash, end of period ....................................     $   1,311      $   2,604      $   2,424
                                                                  =========      =========      =========
     Supplemental cash flow data:
       Interest paid ........................................     $   1,339      $   4,619      $   6,275
                                                                  =========      =========      =========
       Income taxes paid ....................................     $   1,746      $     749      $     249
                                                                  =========      =========      =========
     Non-cash activities:
       Treasury stock redeemed in connection with acquisition            --             --      $     242
                                                                  ---------      ---------      --------- 
       Assets acquired by incurring notes payable ...........            --             --      $     162
                                                                  ---------      ---------      --------- 
       Loan origination fees ................................            --             --      $     250
                                                                  ---------      ---------      --------- 
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                       29
<PAGE>   30


                      WEST COAST ENTERTAINMENT CORPORATION

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                                                        TOTAL
                                                                             ADDITIONAL   ACCUMULATED                  STOCK-
                                                        COMMON STOCK           PAID-IN      SURPLUS      TREASURY     HOLDERS'
                                                        ------------           -------      -------      --------     --------
                                                    SHARES        AMOUNT       CAPITAL     (DEFICIT)       STOCK       EQUITY
                                                    ------        ------       -------     ---------       -----       ------
<S>                                             <C>            <C>         <C>           <C>           <C>         <C>
Balance at January 31, 1996 ................     14,000,001     $  140     $     819     $    (416)    $    --     $     543
May 14, 1996 0.34-1  reverse stock split ...     (9,243,713)       (92)           92            --          --             0
Shares issued - public offering ............      5,400,000         54        60,778            --          --        60,832
Shares issued or to be issued - 1996       
   acquisitions ............................      3,614,174         36        42,258            --          --        42,294
Net income .................................             --         --            --         3,466          --         3,466
                                                 ----------     ------     ---------     ---------     -------     ---------
Balance at January, 31 1997 ................     13,770,462        138       103,947         3,050          --       107,135
Shares issued - Employee Stock Purchase
   Plan ....................................         36,567         --           116            --          --           116
Shares issued - 1996 acquisitions ..........         36,077         --            --            --          --            --
Net (loss) .................................             --         --            --        (3,570)         --        (3,570)
                                                 ----------     ------     ---------     ---------     -------     ---------
Balance at January 31, 1998 ................     13,843,106        138       104,063          (520)         --       103,681
Shares issued - Employee Stock Purchase Plan         39,506          1            33            --          --            34
Shares issued - 1996 acquisitions ..........        302,065          3            (3)           --          --            --
Treasury stock,  at cost ...................             --         --            --            --        (242)         (242)
Net (loss) .................................             --         --            --       (27,217)         --       (27,217)
                                                 ----------     ------     ---------     ---------     -------     ---------
Balance at January 31, 1999 ................     14,184,677     $  142     $ 104,093     $ (27,737)    $  (242)    $   6,256
                                                 ==========     ======     =========     =========     =======     =========
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.


                                       30
<PAGE>   31
                      WEST COAST ENTERTAINMENT CORPORATION

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


1.  BASIS OF PRESENTATION AND BUSINESS

BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared assuming
West Coast Entertainment Corporation and subsidiaries (collectively the
"Company") will continue as a going concern. As discussed in Note 7, the Company
has approximately $58.1 million of its debt maturing February 15, 2000.

Although the Company believes that its projected cash flow will be sufficient to
meet its operating needs until the debt maturity date mentioned above, there can
be no assurances beyond that date.

While the Company is continuing to monitor and reduce its operating expenses,
including payroll, it is also considering the sale of certain assets or
operations as well as exploring other alternatives, including, but not limited
to a merger or refinancing.

BUSINESS

    The Company was incorporated in the State of Delaware in February 1995 for
the purpose of conducting business as an owner and operator as well as a
franchisor of videocassette rental stores. Upon incorporation, 10,000 shares
were issued to the Company's then existing shareholders. On July 12, 1995, in
connection with an anticipated initial public offering, Giant Video, Inc., G.V.
Management Corporation, Nostalgia Ventures, Inc. and Videosmith, Inc. were
merged into the Company (the "Merger"). These four entities were individually
formed or acquired in the past and were under substantial common ownership and
common day-to-day management prior to the Merger.

    On May 17, 1996, the Company completed an initial public offering which
consisted of 5,400,000 shares of common stock at $13.00 per share (the
"Offering"). The net proceeds of the Offering, after deducting applicable
issuance costs and expenses, were $60.8 million. The proceeds were used to fund
certain of the acquisitions discussed in Note 11 and to repay approximately $9.6
million of long-term debt.

    As of January 31, 1998, the Company owned and operated 286 video rental
stores and was a franchisor of a chain of 217 video stores. As of January 31,
1999, the Company owned and operated 261 video rental stores and was a
franchisor of a chain of 160 video stores.

    On April 30, 1998 the Company adopted a fiscal year ending on the first
Sunday following January 30, which will result in the Company having a 52, or
periodically, a 53 week fiscal year. Results for each of the years ended in the
three year period January 31, 1997 through January 31, 1999 reflect 52 week
years.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    A summary of the Company's significant accounting policies follows:

Use of Estimates

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

Consolidation


                                       31
<PAGE>   32
    All significant intercompany balances and transactions have been eliminated
in the accompanying consolidated financial statements.

Concentration of Credit Risk

    Financial instruments which may subject the Company to concentration of
credit risk at January 31, 1999 and 1998 consist primarily of franchise
receivables. The Company obtains franchise-related revenues from an initial fee
and ongoing fees and royalties based on a percentage of franchisees' gross
revenue, as reported monthly by the franchisees to the Company. No assurance can
be given that the franchisees will continue to operate at levels sufficient to
remit amounts due under these arrangements.

Business Risk

The Company competes with pay-per-view cable and satellite television systems
("Pay-Per-View"), to which cable television subscribers pay a fee to see a movie
or other programs selected by the subscriber. Existing Pay-Per-View services
offer a limited number of channels and programs and are generally available only
to limited households. Recently developed technologies have allowed rapid
transmission of a larger number of movies to a broader base of homes.
Ultimately, further improvements in these technologies or the development of
similar technologies could lead to a broader selection of movies to consumers on
demand, which could have a material adverse effect on the Company's financial
condition and results of operations.

Fair Value of Financial Instruments

      The carrying amounts of cash and cash equivalents, accounts receivable,
other receivables, and accounts payable meeting the definition of a financial
instrument approximate fair value at January 31, 1999 and 1998 due to their
short maturity. Fair value of long-term debt is based upon rates available to
the Company for debt with similar terms and maturities.

Merchandise Inventory

    Merchandise inventory, consisting primarily of videocassettes and video
games, is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.

Videocassette Rental Inventory

Effective November 2, 1998, the Company adopted a new method of amortizing its
videocassette rental inventory in order to better match an industry change in
the stream of revenues resulting from the new practice of revenue sharing
adopted during 1998 as an alternative to historical business models of directly
purchasing rental titles. Under revenue sharing, the retailer typically incurs
an upfront fee to acquire videocassettes, with an ongoing requirement to share
the revenue generated on a pre-determined percentage over a specific period of
time with the studios. Given the lower cost of product, the retailer has the
additional requirement of acquiring 2 to 4 times the number of copies of a title
than they would have acquired under the prior purchase models. This new practice
is founded upon the slope over time of consumer demand and the related
desirability of titles over time. Under the Company's new method of
amortization, all new release, non-revenue sharing videocassettes, regardless of
the number of copies of a title, will be amortized to a salvage value of $6 over
a period of 6 months. Videocassettes purchased through revenue sharing
agreements will be amortized to the $6 salvage value over the life of the
respective contracts. Studios' share of revenues will be expensed as such
revenues are earned as specified in each agreement.

The new method of amortization has been applied to videocassette rental
inventory that was owned at November 2, 1998. The adoption of the new method of
amortization has been accounted for as a change in accounting estimate and,
accordingly, the Company recorded a $16,738,000 pre-tax valuation charge to
operating expenses in the fourth quarter of fiscal 1999.

    Prior to November 2, 1998 videocassette rental inventory, which includes
video games, was stated at cost and amortized as follows: videocassette rental
inventory base stock was amortized over its economic life of 36 months, 


                                       32
<PAGE>   33
to its estimated salvage value of $6. New release base stock (the first three
copies of a title in a particular store), less the $6 salvage value, was
amortized 50% in the first six months, then amortized on a straight-line basis
to the $6 salvage value over the remaining 30 months. All copies of new release
videocassette rental inventory in excess of three copies per store were
amortized to $10 on a straight-line basis during the first nine months, and the
balance was then amortized on a straight-line basis over 27 months to the $6
salvage value. The unamortized cost, if any, of videocassette rental inventory
that was sold was charged to operations at the time of the sale. This method of
amortization was applied to videocassette rental inventory that was held in
inventory at August 1, 1997. The adoption of this method of amortization was
accounted for as a change in accounting estimate effected by a change in
accounting principle and, accordingly, the Company recorded an $803,000 pre-tax
charge to operating expense in the third quarter of fiscal 1998.

    Videocassette inventory amortization expense resulting from the allocation
of purchase price to videocassette rental tapes of acquired entities was based
on current replacement cost for bulk purchases of used tapes. As discussed
above, base stock was assigned a three-year amortizable life which served to
extend the remaining economic useful lives of videocassette rental tapes
acquired. Replacement cost for bulk purchases of used tapes is significantly
less than the cost of bulk purchases of used tapes. Base stock was assigned a
three year amortizable life which served to extend the remaining economic useful
lives of videocassette rental tapes acquired. Replacement cost for bulk
purchases of used tapes is significantly less than the cost of new tape
purchases. As a result, future amortization relating to these tapes, on a per
tape basis, would have been significantly less than the amortization relating to
new tape purchases. The favorable effects resulting from purchase accounting
would have diminished with the passage of time and would not have extended
beyond the three-year period subsequent to acquisition which is the period over
which these tapes would have been amortized.

    Prior to August 1, 1997, videocassette rental inventory, which includes
video games, was stated at cost and was amortized over its estimated economic
life with no provision for salvage value. Videocassettes that were considered
base stock were amortized over 36 months on a straight-line basis. New release
videocassettes were amortized as follows: the first through third copies of each
title per store were amortized as base stock and succeeding copies of each title
per store were amortized over nine months on a straight line basis. The
unamortized cost, if any, of videocassette rental inventory that was sold was
charged to operations at the time of the sale.

Intangible Assets

    Intangible assets, net of accumulated amortization, primarily consist of
goodwill ($104,821,000 and $110,843,000 at January 31, 1999 and 1998,
respectively) and franchise rights ($5,457,000 and $5,926,000 at January 31,
1999 and 1998, respectively). Franchise rights are amortized on a straight-line
basis over 15 years, the estimated economic life of such rights. Goodwill
resulting from acquisitions accounted for using the purchase method is amortized
on a straight line basis over 20 years. Total amortization expense related to
intangible assets was $3,420,000, $6,239,000 and $6,493,000 for the years ended
January 31, 1997, 1998 and 1999, respectively. The carrying value of long-lived
assets, including goodwill and franchise rights, is evaluated whenever changes
in circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such review for recoverability, the Company compares
the undiscounted expected future cash flows to the carrying value of long-lived
assets and identifiable intangibles. If the anticipated undiscounted future cash
flows are less than the carrying amount of such assets, the Company recognizes
an impairment loss for the difference between the carrying amount of the assets
and their estimated fair value. The Company has determined at the year ended
January 31, 1999 that there has been an impairment to goodwill associated with
the acquisition of three stores made in November, 1996. Accordingly, the Company
recorded a write-down of $700,000 which is included in the valuation charges in
the consolidated financial statement of operations for fiscal 1999.

Furnishings, Equipment and Leasehold Improvements

Furnishings, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives (3 to 10 years) of furnishings and equipment and, for
leasehold improvements, over the lesser of the estimated useful lives or lease
terms (primarily 5 to 10 years). Repair and maintenance costs are expensed as 
incurred.

Deferred Rent


                                       33
<PAGE>   34

    Most of the Company's operating leases have lease terms which contain fixed
increases of the minimum lease rates. The Company recognizes rental expense for
these leases on a straight-line basis and records the difference between the
amount actually paid and the amount expensed as deferred rent.

Income Taxes

    Tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of the
Company's assets and liabilities. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance.

Revenue Recognition

    Revenue is recognized at the time of rental or sale of a videocassette or
video game. Franchise fees, related to the sale of franchises are recognized
when the stores are opened for business. Post-sale franchise fees are recognized
based on stated percentages of franchisee revenue as defined in the franchise
agreements when collection is reasonably determined.

Advertising Costs

    Advertising costs are recorded net of any cooperative and market development
fund reimbursements due from suppliers and are expensed as incurred.


Earnings Per Share

    In February 1997, Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share" ("SFAS 128"), which establishes standards for computing and
presenting earning per share. SFAS 128 requires presentation of both basic and
diluted earnings per share. Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed in a similar manner except that
the weighted average number of common shares is increased for potential dilutive
common shares. Potentially dilutive common shares for the 1997 computation of
diluted earnings per share were immaterial. Potentially dilutive common shares
are excluded from the diluted earnings per share calculation at January 31, 1998
and 1999 because the effect would be anti-dilutive.

Accounting for Stock Based Compensation

    SFAS No. 123, "Accounting for Stock-Based Compensation" requires the fair
value of stock options and other stock-based compensation issued to employees to
either be recognized as compensation expense in the income statement or be
disclosed as a pro forma effect on net income and earnings per share in the
footnotes to the Company's financial statements. The Company has elected to
adopt the "disclosure basis only" provision s of SFAS 123 for Stock Based
Compensation to employees (Note 12).

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments"
("SFAS 133"), which establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
Presently, the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly, the Company believes that the
adoption of SFAS 133 will have no impact on its financial position or results of
operations. 

In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities" which
provides guidance on the financial reporting of start-up costs and organization
costs. SOP 98-5 requires that an entity expense such costs as incurred. The
Company believes that 


                                       34
<PAGE>   35
the adoption of SOP 98-5 will not have a material impact on its financial
position or results of operations.

3.  VIDEOCASSETTE RENTAL INVENTORY

    Videocassette rental inventory and related amortization are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                           JANUARY 31,
                                                           -----------
                                                        1998       1999
                                                        ----       ----
<S>                                                  <C>        <C>     
             Videocassette rental inventory ........ $ 69,257   $ 87,985
             Accumulated amortization ..............  (37,252)   (67,610)
                                                     --------   --------
                                                     $ 32,005   $ 20,375
                                                     ========   ========
</TABLE>

    Amortization expense related to videocassette rental inventory totaled
$11,265,000, $25,959,000 and $24,656,000 for the years ended January 31, 1997,
1998 and 1999, respectively. In addition, the Company recorded valuation charges
of $16,738,000 in the fourth quarter of fiscal 1999 (see Note 2).

4.  FURNISHINGS, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

    Furnishings, equipment and leasehold improvements comprise the following (in
thousands):

<TABLE>
<CAPTION>
                                                      JANUARY 31,
                                                      -----------
                                                     1998       1999
                                                     ----       ----
<S>                                             <C>        <C>     
         Furniture and fixtures................  $  14,790  $  15,541
         Computer equipment and vehicles.......      2,978      3,729
         Leasehold improvements................      5,464      6,094
                                                 ---------  ---------
                                                    23,232     25,364
         Accumulated depreciation and
         amortization..........................     (4,279)    (7,472)
                                                 ---------  ---------
                                                 $  18,953  $  17,892
                                                 =========  =========
</TABLE>

    Depreciation and amortization approximated $898,000, $2,471,000 and
$3,300,000 for the years ended January 31, 1997, 1998 and 1999, respectively.

5.  NON-CURRENT OTHER ASSETS

    Non-current other assets consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                         JANUARY 31,
                                                                         -----------
                                                                      1998        1999
                                                                      ----        ----
<S>                                                                 <C>         <C>  
      Store lease and utility deposits................                1,117       1,088
      Deferred loan origination fees..................                1,237       1,016
      Other...........................................                   50         352
                                                                    -------     -------
                                                                    $ 2,404     $ 2,456
                                                                    =======     =======
</TABLE>

6.  ACCRUED EXPENSES

    Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                    JANUARY 31,
                                                    -----------
                                                   1998      1999
                                                   ----      ----
<S>                                               <C>       <C>    
         Accrued wages and taxes...               $ 1,097   $   987
         Sales taxes...............                   998       813
         Deferred rent.............                   949     1,170
         Provision for store closing charges           --     2,936
         Other................................      1,882     1,877
                                                  -------   -------
                                                  $ 4,926   $ 7,783
                                                  =======   =======
</TABLE>

7.  LONG-TERM DEBT

                                       35
<PAGE>   36


    Long-term debt is comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                                      JANUARY 31,
                                                                      -----------
                                                                    1998       1999
                                                                    ----       ----
<S>                                                               <C>        <C>     
     Credit Facility.........................................     $ 65,000   $ 66,100
     Various notes payable due in monthly installments with
       interest rates varying from prime plus 2% to prime 
       plus 4% ..............................................           14        168
                                                                  --------   --------
                                                                    65,014     66,268
     Less: current portion...................................           (8)    (8,081)
                                                                  --------   --------
                                                                  $ 65,006   $ 58,187
                                                                  ========   ========
</TABLE>

On December 15, 1997, the Company signed an agreement which incorporated the
major points of, but superceded, its previous bank loan agreement (the "New
Facility"). On June 11, 1998 and September 14, 1998, the Company signed
amendments to the New Facility changing the term of the loan as well as certain
maximum debt-to-operating cash flow ratios and minimum operating cash flow
requirements as defined, as well as modifying certain permitted capital and
other expenditures.

On January 12, 1999, the Company signed an amendment to the New Facility (the
"Revised Facility") increasing the Bank's commitment by $5 million (the
"Overadvance") to a total of $70 million as well as providing for certain credit
enhancements. The Revised Facility is a non-revolving loan maturing on February
15, 2000. At January 31, 1999, the Company had approximately $3.9 million
available under the Revised Facility.

The first $65 million of the Revised Facility bears interest at 2% above the
Prime rate (9.75% at January 31, 1999). The interest rate on the first $4
million of the Overadvance is equal to the Prime rate plus 2.5% (10.25% at
January 31, 1999); the interest rate on the remaining $1 million is equal to the
Prime rate plus 3.5%. Should the Company not repay all debt in full on or prior
to June 30, 1999, an additional 3% of interest for the preceding six months on
the $65 million and on any Overadvance borrowed in the last six months will
become due. In addition, Commitment Extension Fees equaling 143 basis points
times the total outstanding debt will be due and payable each month as of July
1, 1999 through February 15, 2000 should the debt remain unpaid as of August 31,
1999, subject to certain conditions.

Any payments of principal of the Revised Facility after the Overadvance
permanently reduces the available amounts under the Facility. Commitment
reductions commence on August 1, 1999 whereby a $3 million reduction occurs,
followed by $2.5 million reductions on November 1, 1999 and on February 1, 2000
with the remaining balance of $58.1 million maturing on February 15, 2000.

The Revised Facility also provided for delivery to the agent on behalf of the
banks of a warrant to purchase, in the event that the all debt is not paid in
full by September 30, 1999, subject to certain conditions, up to 5% of the
Company's capital stock at a price equal to 75% of the average price of the
stock during the 15 days prior to July 1, 1999.

The Revised Facility is secured by a first security interest in substantially
all of the Company's assets, including the stock of its subsidiaries, and
provides for certain restrictive covenants, including those of a financial
nature.

    Principal due on long-term debt for each of the years following January 31,
1999 is as follows (in thousands):

<TABLE>
<CAPTION>
            YEARS ENDED JANUARY 31,
            -----------------------
<S>                                         <C>  
            2000....................           8,081
            2001....................          58,150
            2002....................              37
                                            --------
                                            $ 66,268
                                            ========
</TABLE>


                                       36
<PAGE>   37

8.  INCOME TAXES

    The components of the provision for income taxes are as follows (in
thousands):

<TABLE>
<CAPTION>
                              YEARS ENDED JANUARY 31,
                              -----------------------
                             1997      1998      1999
                             ----      ----      ----
<S>                        <C>       <C>       <C>
         Current:
           Federal....     $1,760    $  (817)  $ (232)
           State......        781        211      181
                           ------    -------   ------
                            2,541       (606)     (51)
                           ------    --------  -------
         Deferred:
           Federal....        584        (44)   (1380)
           State......        102       (412)     459
                           ------    --------  ------
                              686       (456)    (921)
                           ------    --------  -------
         Tax provision     $3,227    $(1,062)  $ (972)
                           ======    ========  =======
</TABLE>

    The temporary differences which give rise to deferred tax assets and
liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                      JANUARY 31,
                                                                      -----------
                                                                   1998        1999
                                                                   ----        ----
<S>                                                            <C>          <C>
         Deferred tax assets:
           Recognized built-in loss carryforward ..........    $    207     $    207
           Allowance for doubtful accounts ................          41           27
           Expense accruals ...............................         578        1,815
           Valuation allowance for rental inventory .......          --        6,685
           Federal and State NOL carryforwards ............         966        6,739
                                                               --------     --------
                                                                  1,792       15,473
                                                               --------     --------
         Deferred tax liabilities:
           Intangible amortization ........................      (1,872)      (2,300)
           Videocassette rental inventory amortization ....         (45)      (3,343)
           Furnishings, equipment and leasehold improvement                           
           depreciation ...................................        (796)      (2,079)
                                                                --------     --------
                                                                  (2,713)      (7,722)
                                                                --------     --------
         Net deferred taxes before valuation allowance ....         (921)       7,751
         Valuation Allowance ..............................           --       (7,751)
                                                                --------     --------
                                                                $   (921)    $      0
         Net deferred tax liability .......................     ========     ========
</TABLE>

Because of the uncertainty that the Company will generate income in the future
sufficient to fully or partially utilize deferred assets, a valuation allowance
in the amount of $7.8 million at January 31, 1999 is provided to reduce such
deferred tax assets to the level of the existing deferred tax liabilities.

The Company has federal net operating loss carryforwards aggregating
approximately $19.4 million and state net operating loss carryforwards
aggregating approximately $24.1 million at January 31, 1999, which expire
through January 31, 2019. At January 31, 1999, the Company has available the
following carryforwards to offset future taxable income:


<TABLE>
<CAPTION>
                   FEDERAL NET OPERATING    STATE NET OPERATING         YEAR END
                   ---------------------    -------------------         --------
                    LOSS CARRYFORWARDS      LOSS CARRYFORWARDS     EXPIRATION DATES
                    ------------------      ------------------     ----------------
<S>                                         <C>                    <C> 
                   $           ----           $   200,000                 1/31/02
                               ----               900,000                 1/31/03
                               ----             2,200,000                 1/31/04
                               ----             1,900,000                 1/31/05
                         19,400,000            18,900,000            1/31/06 - 1/31/19
</TABLE>

    A reconciliation between the provision for income taxes and the amount
determined by applying the U.S. federal statutory rate to income before income
taxes is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                          YEARS ENDED JANUARY 31,
                                                                          -----------------------
                                                                        1997       1998       1999
                                                                        ----       ----       ----
<S>                                                                    <C>       <C>        <C>     
         Income tax at statutory rate of 34%.....................      $2,354    $(1,575)   $(9,584)
           State tax expense, net of federal benefit.............         583       (133)       422
           Change in valuation allowance.........................         (76)       ---      7,751
           Nondeductible intangible amortization.................         359        593        648
           Other.................................................           7         53       (209)
                                                                       ------    -------    -------
                                                                       $3,227    $(1,062)   $  (972)
                                                                       ======    =======    =======
</TABLE>


                                       37
<PAGE>   38

9.  RELATED PARTY TRANSACTIONS

    As of January 31, 1999 and 1998, receivables from certain officers were
$373,000 and $341,000 respectively. Interest has been accrued at a rate of 10%
on such amounts.

10.  LEASE COMMITMENTS

    The Company leases its facilities under operating leases extending until
2008. Minimum future rental payments under these leases as of January 31, 1999
are as follows (in thousands):

<TABLE>
<CAPTION>
             YEARS ENDING JANUARY 31,
             ------------------------
<S>                                         <C>   
             2000...................          14,313
             2001...................          11,077
             2002...................           8,667
             2003...................           6,250
             2004...................           3,994
             Thereafter.............           7,390
                                            --------
             Future minimum payments        $ 51,691
                                            ========
</TABLE>

    Rent expense totaled approximately $11,130,000, $19,061,000 and $21,334,000
for the years ended January 31, 1997, 1998 and 1999, respectively. Rent expense
and the above table do not include any amounts in connection with store closings
(see Note 17).

11.      ACQUISITIONS
     All acquisitions have been accounted for as purchases; operations of the
companies and businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.

May 1996 Acquisitions

    On May 17, 1996, the Company acquired 172 video specialty stores (the "May
1996 Acquisitions"), including 13 stores owned by franchisees of the Company.
Taking into account certain adjustments and calculation of certain contingent
payments, the aggregate consideration of $83.9 million was paid consisting of
the following: $53.0 million in cash, approximately $26.2 million in shares of
common stock (2.1 million shares), and approximately $4.7 million of acquisition
costs. Of these amounts, approximately $0.4 million represents remaining minimum
contingent consideration (of which approximately $0.1 million and $0.3 million
(20,000 shares) is to be paid in cash and stock, respectively) as of January 31,
1998 and 1997. These common shares to be issued have been considered outstanding
as of January 31, 1999, 1998 and 1997 as their issuance is dependent only on the
passage of time.

Early Fall 1996 Acquisitions

      Between August 26 and October 25, 1996, the Company acquired the assets of
21 video specialty stores (the "Early Fall 1996 Acquisitions"). Aggregate
consideration of $13.6 million was paid, consisting of the following: $8.2
million in cash and $4.9 million in shares of common stock (519,000 shares).
Approximately $0.5 million of acquisition costs was also paid. The shares
(465,000) associated with one of these acquisitions were issued in the year
ended January 31, 1999 in three equal installments (six, twelve and eighteen
months from the acquisition date) and the number of shares issued was increased
by the difference between the share price at issuance date and the formulaic
common share price calculated as of the date of acquisition. Additionally,
92,000 shares associated with another Early Fall 1996 Acquisition are to be
issued. In both instances these common shares and other common shares to be
issued in installments have been considered outstanding as of January 31, 1999,
1998 and 1997 as their issuance is dependent only on the passage of time.

Late Fall 1996 Acquisitions

    Between November 15 and December 3, 1996, the Company acquired the assets of
47 video specialty stores (the "Late Fall 1996 Acquisitions"), including 19
stores owned by franchisees of the Company for aggregate consideration of $27.7
million consisting of the following: $14.4 million in cash and $11.0 million in
shares of common stock (1.0 million shares) and approximately $2.3 million of
acquisition costs. Additionally, 243,000 and 25,000 shares were to be issued as
of January 31, 1998 and 1997, respectively. These common shares to be issued


                                       38
<PAGE>   39

have been considered outstanding as of January 31, 1999, 1998 and 1997 as their
issuance is dependent only on the passage of time.

June, 1997 Acquisitions

    On June 16, 1997, and June 24, 1997 the Company acquired a total of 38 video
specialty stores (the "June, 1997 Acquisitions"), including 5 stores owned by a
franchisee of the Company for aggregate consideration of $17.9 million
consisting of $17.2 million in cash and approximately $0.7 million of
acquisition costs.

Year Ended January 31,1999 Acquisitions

    During the year ended January 31, 1999 the Company has made certain
acquisitions that were not material.

    The allocation of the purchase price associated with the acquisitions made
during the years ended January 31, 1997 and 1998 are summarized as follows:

<TABLE>
<CAPTION>
                                                               JANUARY 31,
                                                               -----------
                                                             1997        1998
                                                             ----        ----
<S>                                                       <C>         <C>      
         Working Capital..............................    $  (3,326)  $     439
         Videocassette rental inventory...............       16,019       2,917
         Furnishings, equipment, and leasehold                7,915       2,833
            improvements..............................
         Intangible assets............................      105,323      13,146
         Other........................................         (756)         --
                                                          ----------  ---------
                                                          $ 125,175   $  19,335
                                                          =========   =========
</TABLE>


    The following unaudited pro forma information presents the results of
operations as though (i) the May 1996 Acquisitions, the Early Fall 1996
Acquisitions, Late Fall 1996 Acquisitions and June 1997 Acquisitions had
occurred as of the beginning of the periods presented, (ii) each entity included
in the consolidated statement of operations had been included in the Company's
consolidated income tax returns and subject to corporate income taxation as a C
corporation during all periods presented, (iii) the repayment of all previously
existing outstanding debt had occurred as of the beginning of the periods
reported, and (iv) the borrowings under the Credit Facility had occurred as of
the beginning of the periods presented.

    The following unaudited pro forma net income (loss) per share for the years
ended January 31, 1997 and 1998 was calculated by dividing the respective
unaudited pro forma net income (loss) by the pro forma weighted average number
of shares of common stock outstanding after giving effect to (i) the 0.340-for-1
reverse stock split approved by the Board of Directors on May 14, 1996, and the
shares issued in conjunction with the Offering, (ii) issuance of shares in
connection with the May 1996, Early Fall 1996 and Late Fall 1996 Acquisitions,
(iii) repayment of outstanding debt at the date of the Offering, and (v) the
impact of a detachable warrant with a primary supplier of videocassettes and a
portion of a convertible note which was converted into shares of the Company's
common stock as if the transactions had occurred on the first day of the periods
presented. The pro forma weighted average number of common shares used to
calculate pro forma net income (loss) per share was 13,999,000 and 13,843,000
for the years ended January 31, 1997 and 1998, respectively.

<TABLE>
<CAPTION>
                                                                           UNAUDITED PRO FORMA
                                                                         YEARS ENDED JANUARY 31,
                                                                    1997                      1998
                                                                    ----                      ----
                                                                (in thousands, except per share data)
<S>                                                             <C>                       <C>      
      Pro forma revenues ...................................    $ 131,378                 $ 130,044
      Pro forma income (loss) before extraordinary item ....    $   7,933                 $  (3,219)
      Extraordinary item (net of tax benefit) ..............    $     244                 $      --
      Pro forma net income (loss) ..........................    $   7,689                 $  (3,219)
      Pro forma income (loss) per share before extraordinary
        item basic and diluted .............................    $     .57                 $    (.23)
      Extraordinary item - basic and diluted ...............    $    (.02)                $      --
      Pro forma net income (loss) per share - basic and
        diluted ...........................................  .  $     .55                 $    (.23)
</TABLE>


                                       39
<PAGE>   40

12.  STOCKHOLDERS' EQUITY

     Stock Compensation Plan:

    Equity Incentive Plan: The Company's Equity Incentive Plan was adopted by
the Board of Directors and approved by the Stockholders in July 1995 and as
amended in April 1997 (the "Equity Plan"). The Equity Plan enables the Company
to grant options to purchase common stock to officers, employees, employee
directors of and consultants to the Company. The Plan authorizes the issuance of
up to 850,000 shares. The options granted are unvested at the date of grant, and
become fully vested pro-rata equally over five years subsequent to the date of
grant. The fixed exercise price associated with the shares subject to option is
the fair value of the Company's stock at the date of grant. The options expire
ten years after the date of grant.

    Director Stock Option Plan: The Company's Director Stock Option Plan (the
"Director Option Plan") enables the Company to grant options to purchase common
stock to outside directors of the Company. The Plan authorizes the issuance of
up to 50,000 shares. The options are unvested at the time of grant, and vest
pro-rata equally over a three-year period, provided the optionholder continues
to serve as a director of the Company, and will expire ten years from the date
of grant. The fixed exercise price associated with the shares subject to options
under this plan is the fair value of the Company's stock at the date of grant.
Commensurate with the Offering, the Company granted an option to purchase 3,000
shares of common stock to three non-employee directors. Each non-employee
director is eligible to receive at the discretion of the Company a subsequent
grant of an option for 1,000 shares on the date of each Annual Meeting of
Stockholders, at which such director is reelected as a director of the Company,
beginning with the Annual Meeting for the year ended January 31, 1998. As of
January 31, 1999, 6,000 options are outstanding. No options have been exercised
for the years ended January 31, 1998 and 1999.

    Common shares subject to options under these plans were as follows:

<TABLE>
<CAPTION>
                                                    YEARS ENDED JANUARY 31,
                                             1998                          1999
                                             ----                          ----
                                                   WEIGHTED                     WEIGHTED 
                                                   AVERAGE                      AVERAGE            
                                     OPTIONS    EXERCISE PRICE    Options    EXERCISE PRICE
                                     -------    --------------    -------    --------------
<S>                                  <C>        <C>              <C>          <C>        
Outstanding at February 1 .......     82,137    $     11.06       14,137       $     10.54
Granted .........................         --             --      226,250       $       .25
Exercised .......................         --             --           --                --
Terminated/Canceled .............     68,000    $     12.85        2,588       $      8.75
                                      ------                     -------
Options outstanding at January 31     14,137    $     10.54      237,799       $       .77
                                      ------                     -------
Options exercisable at January 31      4,034    $     10.86        6,774       $     11.26
                                      ------                     -------
</TABLE>

    As discussed in Note 2, the Company adopted the disclosure requirements of
SFAS No. 123. The pro forma information below is presented as if the Company had
adopted the recognition provisions of SFAS 123.

<TABLE>
<CAPTION>
                                                                             1997            1998             1999
                                                                             ----            ----             ----
<S>                                                                     <C>             <C>              <C>
    Weighted average fair value of options granted -- calculated using
      the Black-Scholes option-pricing model.....................       $         4.63  $         4.63   $        .50
    Range of exercise price per share............................       $  8.75-$13.00  $  8.75-$13.00   $ .25-$13.00
    Actual:                                                                                               
      Net income (loss) (in thousands)...........................       $        3,466  $       (3,570)  $    (27,217)
      Earnings (loss) per share, basic and diluted...............       $          .33  $         (.26)  $      (1.93)
    Pro Forma:                                                                                            
      Net income (loss) (in thousands)...........................       $        3,431  $       (3,601)  $    (27,217)
      Earnings (loss) per share, basic and diluted...............       $          .33  $         (.26)  $      (1.93)
                                                                                                 
    Assumptions:                                                                                          
      Weighted average dividend yield............................                   --              --             --
      Weighted average volatility................................                   35%             35%            75%
      Weighted average risk free interest rate...................                 6.58%           6.58%           5.50%
      Weighted average expected life (years).....................                    5               5               5
</TABLE>

    Employee Stock Purchase Plan: The Company's Employee Stock Purchase Plan
(the "Purchase Plan") authorizes the issuance of up to a total of 125,000 shares
of common stock to participating employees through a series of semiannual
offerings. Offering periods will commence on each November 1, beginning November
1, 1996, and May 1 and terminate on the following April 30 and October 31,
respectively. The maximum number of shares 


                                       40
<PAGE>   41

available in each offering is 25,000 shares. Eligible employees may direct
1%-10% of their total compensation in a Plan period to the Plan, at a price
equal to 85% of the lower of the closing price of the common stock on the first
business day of the plan or the last business day of the plan. During the fiscal
years ended January 31, 1998 and 1999, the Company had issued approximately
37,000 and 40,000 shares, respectively, related to the Plan.

13.  PREFERRED STOCK

     The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate of 2,000,000 shares of preferred stock, in one or more series. Each
such series of preferred stock shall have such number of shares, designations,
preferences, voting powers, qualifications and special or relative rights or
privileges as shall be determined by the Board of Directors, which may include,
among others, dividend rights, voting rights, redemption and sinking fund
provisions, liquidation preferences, conversion rights and preemptive rights.
The rights of the holders of common stock will be subject to the rights of
holders of any preferred stock issued in the future. The issuance of preferred
stock could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, a majority
of the outstanding voting stock of the Company. The Company has not issued any
shares of preferred stock.

14.  COMMITMENTS
Purchase Commitments

    On July 12, 1995, with an Amendment on August 20, 1997, the Company entered
into a contract with a supplier of video rental products that requires the
Company to purchase, at a discount, its requirements for such products over the
ensuing seven year period as follows:

<TABLE>
<S>                                                           <C>
                   August 20, 1998-July 12, 2000.......       Lesser of 30% of annual requirements or $25 million
                   July 13, 2000-July 12, 2002.........       lesser of 25% of annual requirements or $25 million
</TABLE>

15.  LITIGATION

    The Company is involved in litigation in the ordinary course of business.
The Company believes that the outcome of such litigation will not materially
affect the Company's financial position or results of operations.


16.      DEBT OFFERING WRITE-OFF

    On July 1, 1997 the Company's planned private placement of debt securities
(the "Proposed Private Placement") and related acquisitions were indefinitely
delayed due to market conditions. The Company wrote off $5.1 million in costs
during the year ended January 31, 1998 that were incurred in connection with the
Proposed Private Placement and related acquisitions.

17.      STORE CLOSING CHARGES
    During the quarter ended November 1, 1998, the Company began and completed
an extensive analysis of its base store performance and made a decision to close
33 of its stores. This analysis resulted in the Company recording charges of
approximately $5,557,000. The components of the charges included approximately
$3,100,000 for lease terminations and miscellaneous closing costs, as well as
approximately $2,457,000 in property asset write downs.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
FINANCIAL DISCLOSURE

None.


                                       41
<PAGE>   42
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth below are the names and certain information with respect to
each director, nominee for election as a director, and executive officer of the
Company.

         Ralph W. Standley III, age 60, has served as the Chairman of the Board
of Directors of the Company and its principal predecessors since 1992. He also
served as President of two such predecessors, Nostalgia Ventures, Inc. ("NVI")
and Videosmith (DE) Incorporated ("VDI"), and as Secretary of two other
predecessors, Giant Video Corporation ("GVC") and G.V. Management Corp.
("GVMC"), from the date of their inception or acquisition by the Company through
July 1995. Ralph W. Standley III is the father of T. Kyle Standley and M. Trent
Standley.

         T. Kyle Standley, age 35, has served as the President and Chief
Executive Officer and a Director of the Company and its predecessors since its
inception in February 1995. Previously, he served as an executive officer of two
of the Company's predecessors, GVC and GVMC, commencing in 1991. Mr. Standley
was director of research at Colliers International Property Consultants from
1989 to 1991, and prior thereto was a financial analyst at Paine Webber
Incorporated.

         M. Trent Standley, age 34, has served as a Vice President, Secretary
and a Director of the Company since May 1995. He also served as President of one
of the Company's predecessors, GVI, from 1989 to 1995, as Vice President of two
other predecessors, VDI from 1994 to 1995, and GVMC from 1992 to 1995, and as
Secretary of a fourth predecessor, NVI, from 1993 to 1995.

         C. Stewart Forbes, age 58, a Director of the Company since May 1996,
has served as President of Colliers International Property Consultants since
1979.

         Wesley F. Hoag, age 42, a Director of the Company since May 1996, has
served as General Counsel and Chief Operating Officer of the R. Meeder &
Associates, Inc., a registered investment adviser ("Meeder"), since July 1993,
and since April 1994 has served as Vice President of The Flex-funds and The
Flex-Partners, investment companies managed and sponsored by Meeder. From 1984
to 1993, Mr. Hoag was an attorney at the law firm of Porter, Wright, Morris &
Arthur.

         Richard G. Kelly, age 45, joined the Company as Chief Financial Officer
in July 1996. From January 1994 to June 1996, Mr. Kelly was a shareholder and
served as a Director of Moore, Stephens, Reilly, PC and was a shareholder and
Vice President of Gerald T. Reilly & Co., Certified Public Accountants, Inc. Mr.
Kelly served as Director of Gillis & Kelly, P.C., from 1990 to 1993, at which
time the firm merged with Gerald T. Reilly & Co., Certified Public Accountants,
Inc. Mr. Kelly is a Certified Public Accountant whose responsibilities included
direction of mergers and acquisitions as well as tax and audit related
functions.

         Donald Weiss, age 57, has served as Executive Vice President,
Franchising of the Company since September 1996. From May 1996 to August 1996,
Mr. Weiss served as Vice President -- Franchise Development of the Company. From
November of 1992 until April 1996, he served as Vice President -- Franchising
Development of WCEI. From August 1991 to October 1992, Mr. Weiss served as Vice
President -- Franchising Development of West Coast Enterprises, Inc., and from
March 1989 to July 1991, he served as Executive Director of Franchise
Development of West Coast Enterprises, Inc.

         Jerry L. Misterman, age 52, has served as Executive Vice President --
Finance of the Company since mid-July 1995 and as Chief Financial Officer of WC
Franchise since the acquisition by WC Franchise of certain franchise-related
operating assets in July 1995. Prior to July 1995, Mr. Misterman served as Chief
Financial Officer of each of the WCEI Companies, of Sorbee International, a
manufacturer of sugar-free candies, from March 1989, and of Medical Products
Labs, a manufacturer and distributor of fluoride-related sugar-free dental
products, from March 1990. Prior to 1990, Mr. Misterman's experience included
serving as the Chief Financial Officer of the Seven-Up Bottling Group of
Philadelphia Inc., Corporate Controller and Assistant Treasurer of Aydin
Corporation, a manufacturer of electronic communications systems and equipment,
and also as Chief Financial Officer of Providers Benefit Company, a manager and
operator of several primary health care facilities and a finance company.


                                       42
<PAGE>   43


COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and regulations of the Securities and Exchange Commission
("SEC") thereunder require the Company's executive officers and directors, and
persons who own more than ten percent of the Company's outstanding Common Stock,
to file reports of initial ownership and changes in ownership with the SEC and
the National Association of Securities Dealers, Inc. Such officers, directors
and ten-percent stockholders are also required by SEC rules to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of such forms received by it, or written representations
from certain reporting persons that no other reports were required for such
persons, the Company believes that, during or with respect to the fiscal year
ended January 31, 1999, all of its executive officers, directors and ten-percent
stockholders complied with their Section 16(a) filing obligations.


ITEM 11.  EXECUTIVE COMPENSATION

         The following Summary Compensation Table sets forth certain information
concerning the compensation of the Company's Chief Executive Officer and each of
the other four most highly compensated executive officers whose salaries and
bonuses exceeded $100,000 for services rendered during the fiscal year ended
January 31, 1999 (the "Named Executive Officers"), together with similar
information with respect to the Named Executive Officers for each of the fiscal
years ended January 31, 1997 and 1998.


<TABLE>
<CAPTION>
                                                 Annual Compensation                   
                                                 -------------------                  Long-Term
                                                                                     Compensation
                                                                                       Awards(2)
                                                                                   ----------------
    Name and               Fiscal           Salary    Bonus      Other Annual      Number of shares            All
Principal Position          Year                               Compensation (1)    Underlying Stock     Other Compensation
------------------          ----                               ----------------    ----------------     ------------------
                                                                                         Options
<S>                         <C>           <C>         <C>      <C>                 <C>                  <C>
T. Kyle Standley            1999          $330,049    $75,000
 President and Chief        1998          $230,000      __                                 __                    __
 Executive Officer          1997          $126,507      __             __                  __                    __
Richard G. Kelly            1999          $254,231
 Chief Financial            1998          $200,000      __             __                  __                    __
 Officer                    1997          $126,923      __             __                  __                    __
Ralph W. Standley III       1999          $213,639
 Chairman of the            1998          $150,000      __             __                  __                    __
 Board of Directors         1997          $107,308      __             __                  __                    __
Jerry L. Misterman          1999          $164,942
 Chief Accounting           1998          $150,000      __             __                  __                    __
 Officer                    1997          $151,154      __             __                  __                    __
Donald Weiss                1998          $150,000
 Executive Vice             1997          $150,000      __             __                  __                    __
 President                  1996          $129,944      __             __                  __                    __
</TABLE>


--
(1)      Other compensation in the form of perquisites and other personal
         benefits has been omitted for certain of the Named Executive Officers,
         in accordance with the rules of the Securities and Exchange Commission,
         as the aggregate amount of such perquisites and other personal benefits
         for such officers constituted less than the lesser of $50,000 or 10% of
         the total annual salary and bonus for each executive officer in each
         fiscal year covered.

(2)      The Company did not make any restricted stock awards, grant any stock
         appreciation rights or make any long-term incentive plan payouts to
         these individuals during any fiscal year covered.


                                       43
<PAGE>   44


Option Grants. In October 1998, both Jerry L. Misterman and Donald Weiss were
granted incentive stock options under the Company's equity incentive plan of
8,000 and 6,000 options respectively, at an exercise price of $0.25. The options
granted are unvested at the date of grant and become fully vested pro-rata
equally over five years subsequent to the date of grant.


Option Exercises and Holdings. None of the Executive Officers exercised any
options to purchase Common Stock of the Company. At January 31, 1999, both Jerry
L. Misterman and Donald Weiss have outstanding holdings of 8,000 and 6,000
options respectively.

COMPENSATION OF DIRECTORS

         Non-employee directors receive an annual stipend of $10,000 and all
directors are reimbursed for expenses incurred in connection with attendance at
Board of Directors and committee meetings.

         Under the Company's 1995 Director Stock Option Plan, as amended to date
(as amended, the "Director Option Plan"), each non-employee director is eligible
to receive options for such number of shares of Common Stock and at such times
as the Board of Directors may determine, which options have an exercise price
equal to the fair market value of the Common Stock on the date of grant. All
options granted under the Director Option Plan vest over a three-year period,
provided the optionholder continues to serve as a director of the Company, and
expire ten years from the date of grant. The Director Option Plan was adopted by
the Board of Directors and approved by the stockholders of the Company in July
1995, and was amended by the Board of Directors in October 1996. The total
number of shares of Common Stock that may be issued under the Director Option
Plan is 50,000. Messrs. Forbes and Hoag have each been granted an option under
the Director Option Plan to purchase 3,000 shares of Common Stock at an exercise
price of $13.00 per share.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The members of the Compensation Committee during the fiscal year ended
January 31, 1999, were Wesley F. Hoag and C. Stewart Forbes.

         None of the Company's executive officers serves as a member of the
compensation committee (or other board committee performing equivalent functions
or, in the absence of such a committee, the entire board of directors) of
another entity, one of whose executive officers serves on the Compensation
Committee.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

         The Compensation Committee reviews the compensation levels of the
Company's executive officers, makes recommendations to the Board of Directors
regarding compensation, and has authority to grant options under the Company's
1995 Equity Incentive Plan.

         The Company's compensation program seeks to achieve the following
objectives:

         -        To attract and retain key executives who are important to the
                  long-term growth and success of the Company.

         -        To give appropriate incentives based on both individual
                  performance and the performance of the Company as a whole.

         -        To promote identity of interest between the Company's 
                  stockholders and its senior management.

         -        To reward officers for their contributions to growing the
                  number of video stores (through 


                                       44
<PAGE>   45

                  acquisitions and new store construction) and increasing the
                  average annual revenue per store.

         The Company's executive compensation program consists primarily of base
salaries, supplemented by equity incentives and bonuses under appropriate
circumstances. Base salaries are determined in a manner intended to be
comparable to the salaries that are paid to persons performing similar functions
for companies of comparable size in comparable industries, although a number of
subjective factors also influence salary decisions, including the Company's
judgment with respect to a given individual's particular skills, experience and
knowledge of the Company's industry. In addition, the compensation of executives
who joined the Company upon the Company's acquisition of their former employers
reflects the level at which they were compensated by such former employers. The
Company typically reviews executive base salaries on an annual basis. Equity
incentives represent the principal performance-based component of the Company's
compensation program. The Company granted options to both Jerry L. Misterman and
Donald Weiss of 8,000 and 6,000 options respectively. The Company only paid a
bonus to its Chief Executive Officer, T. Kyle Standley, of $75,000 relating to
the fiscal year ended January 31, 1999.

         COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. In March 1998, the Company
increased Mr. Standley's annual base salary to $330,000 plus a bonus of $75,000.
The Compensation Committee believed that this level of compensation is
appropriate given the rapid growth of the Company and Mr. Standley's
contributions to that growth, as well as the current size of the Company. The
Compensation Committee believes that Mr. Standley's level of compensation is
near the middle of the range of compensation to chief executives for companies
of similar size within the industry.

                                 Compensation Committee

                                 Wesley F. Hoag
                                 C. Stewart Forbes



                                       45
<PAGE>   46
<TABLE>
<CAPTION>
                                      05/14/96      01/31/97     01/30/98    1/31/99
                                      --------      --------     --------    -------
<S>                                   <C>           <C>          <C>         <C>
       West Coast                     $100          $ 64         $ 14        $  9
       Entertainment
       Corporation
       Nasdaq Market Index (US)       $100          $112         $132        $207
       Video Retailers Group          $100          $ 91           43        $175
</TABLE>


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth the beneficial ownership of the
Company's Common Stock as of January 31, 1999 (i) by each person who is known by
the Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) by each director and nominee for election as a director, (iii) by
each of the executive officers, and (iv) by all directors and executive officers
as a group:

<TABLE>
<CAPTION>
                                                                                             Shares Beneficially
               Beneficial Owner                                                                  Owned(1)(2)
               ----------------                                                                  -----------
                                                                                         Number              Percent
                                                                                         ------              -------
<S>                                                                                  <C>                     <C>
               5% STOCKHOLDERS:
               Ralph W. Standley III(3)(4)(5)                                         1,345,765                9.6 
               Ralph W. Standley III Irrevocable Trust(3)(5)                            342,819                2.4 
               T. Kyle Standley(3)(5)(6)                                              1,431,388               10.2 
               Marsh & McLennan Companies, Inc.(7)                                      975,890                6.9 
               OTHER EXECUTIVE OFFICERS:
               Richard G. Kelly(3)                                                                          
               Jerry L. Misterman(3)                                                                        
               Donald Weiss(3)                                                           43,000             
               OTHER DIRECTORS:                                                                             
                        M. Trent Standley(3)(5)(6)                                      647,576                4.6 
               C. Stewart Forbes                                                         14,000                 *
               c/o Colliers International
               84 State Street, 5th Floor
               Boston, MA  02109

               Wesley F. Hoag                                                             2,000                 *
               c/o R. Meeder & Associates
               6000 Memorial Drive
               Columbus, OH  43215
               All directors and executive officers as a group
               (8 persons)(4)(5)(6)(7)                                                3,826,548               27.2 
</TABLE>


--------------
 *       Less than 1%.

(1)      Each stockholder possesses sole voting and investment power with
         respect to the shares listed, except as otherwise indicated. In
         accordance with the rules of the Securities and Exchange Commission,
         each stockholder is deemed to beneficially own any shares subject to
         stock options or warrants which are currently exercisable or which
         become exercisable, or convertible securities which are currently
         exercisable or which become exercisable, within 60 days after February
         28, 1999, and any reference in these footnotes to shares subject to
         stock options held by the person or entity in question refers to stock
         options which are currently exercisable or which become exercisable
         within 60 days after February 28, 1999. The inclusion herein of shares
         listed as beneficially owned does not constitute an admission of
         beneficial ownership.

(2)      Number of shares deemed outstanding includes shares outstanding as of
         February 28, 1999, and any shares subject to stock options held by the
         person or entity in question that are currently exercisable or
         exercisable within 60 days following February 28, 1999.

(3)      These persons have an address c/o the Company, One Summit Square, Suite
         200, Route 413 and Double Woods Road, Langhorne, Pennsylvania 19047.

(4)      Includes 1,281,461 shares held by a revocable trust over which this
         stockholder has sole voting and dispositive power; also includes 64,304
         shares owned by this stockholder's wife as to which this stockholder
         disclaims beneficial ownership.

(5)      Voting and dispositive power over 342,819 shares owned by this trust is
         shared by T. Kyle Standley and John H. Chory, Esq., as co-trustees. The
         beneficiaries of the trust are Ralph W. Standley III's children, who
         include T. Kyle Standley and M. Trent Standley. The numbers of shares
         in the column next to the names of Ralph W. Standley III, T. Kyle
         Standley and M. Trent Standley exclude these shares.

(6)      All shares owned by this individual are pledged to a bank as loan
         collateral.

(7)      Includes [985,900] shares beneficially owned by Putnam Investments,
         Inc., which is a wholly-owned subsidiary of Marsh & McLennan Companies,
         Inc. The shares beneficially held by Putnam Investments, Inc. include
         shares held by two registered investment advisers which Putnam
         Investments, Inc. wholly owns, Putnam Investment Management, Inc. and
         The Putnam Advisory Company, Inc.


                                       46
<PAGE>   47
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The company has granted certain stock options to Messrs. Forbes and
Hoag under the Director Option Plan. See Item 11 -- "Executive Compensation --
Compensation of Director".

         Ralph W. Standley III, the Chairman of the Board of Directors of the
Company, is indebted to the Company under a promissory note between the Company
and Mr. Standley, pursuant to which the Company loaned Mr. Standley $126,103,
at an interest rate of 10% per annum. The promissory note is payable on demand.
As of January 31, 1999, the aggregate amount (including interest) of the loan
outstanding was $148,344.

         T. Kyle Standley, the President and Chief Executive Officer of the
Company, is indebted to the Company under a promissory note between the Company
and Mr. Standley, pursuant to which the Company loaned Mr. Standley $169,499,
at an interest rate of 10% per annum. The promissory note is payable on demand.
As of January 31, 1999, the aggregate amount (including interest) of the loan
outstanding was $199,394.

         The Company has adopted a policy requiring all future transactions
between the Company and its officers, directors and affiliates to be on terms
no less favorable to the Company than could be obtained from unrelated third
parties and to be approved by a majority of the disinterested members of the
Company's Board of Directors.


                                    PART IV


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

     (a)  The following documents are filed as part of this report:

     (1)  Financial Statements
          Reports of Independent Accountants
          Consolidated Balance Sheet at January 31, 1999 and 1998
          Consolidated Statement of Operations for the fiscal years ended
          January 31, 1999, 1998 and 1997
          Consolidated Statement of Cash Flows for the fiscal years ended
          January 31, 1999, 1998 and 1997
          Consolidated Statement of Stockholders' Equity for the fiscal years
          ended January 31, 1999, 1998 and 1997
          Notes to the Consolidated Financial Statements

     (2)  Financial Statement Schedules:

     All schedules are omitted because they are not applicable or the required
     information is shown in the financial statements or notes thereto.

     (b)  Exhibits:



                                       47
<PAGE>   48
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                            DESCRIPTION
----------       -----------------------------------------------------------------------------
<C>         <C>  <S>
      +3.1   --  Certificate of Incorporation
      +3.2   --  First Amendment of Certificate of Incorporation
      +3.3   --  Second Amendment of Certificate of Incorporation
      +3.4   --  Certificate of Correction Filed to Correct a Certain Error in the Second
                 Certificate of Amendment of Certificate of Incorporation
      +3.5   --  Form of Third Certificate of Amendment of Certificate of Incorporation
      +3.6   --  Restated By-Laws
      +3.7   --  Amendment to the Restated By-Laws
      +4.1   --  Specimen certificate for shares of Common Stock
     +10.1   --  Assets Purchase Agreement by and among the Registrant, A-Z Video Systems,
                 Inc., Donald R. Thomas, Art H. Thomas, Harry M. Smith and Dwight M. Thomas,
                 dated as of January 11, 1996
     +10.2   --  Asset Purchase Agreement by and among the Registrant, American Video, Inc.,
                 Red Giraffe Video, Inc., the Lancaster Group, Inc., Nolan Allen, Michael
                 Cappy and P.R. Lancaster, dated as of January 11, 1996, the first amendment
                 thereto dated March 25, 1996 and waiver dated March 12, 1996
     +10.3   --  Asset Purchase Agreement by and among the Registrant, Anthony Cocca's
                 Videoland, Inc. and Anthony Cocca, dated as of January 11, 1996
     +10.4   --  Asset Purchase Agreement by and among the Registrant, Vidko, Inc., Kobie-Co
                 Movie Outlet and Anthony Cocca, dated as of January 11, 1996
     +10.5   --  Asset Purchase Agreement by and between the Registrant and Best
                 Entertainment, Inc., dated as of January 11, 1996
     +10.6   --  Asset Purchase Agreement by and between the Registrant and HB Associates,
                 Inc., dated as of January 11, 1996
     +10.7   --  Asset Purchase Agreement by and between the Registrant and New Age
                 Entertainment, Inc., dated as of January 11, 1996
     +10.8   --  Merger Agreement by and among the Registrant, RKT Subsidiary Corp., Palmer
                 Corporation and the Stockholders named therein, dated as of January 11, 1996,
                 as amended (the "Palmer Merger Agreement")
</TABLE>
 
                                       48
<PAGE>   49
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                            DESCRIPTION
----------       -----------------------------------------------------------------------------
<S>              <C>
     +10.9   --  Stock Purchase Agreement by and among the Registrant, Showtime, Inc. and
                 Clemens J. Wadle, dated as of January 11, 1996
    +10.10   --  Merger Agreement by and among the Registrant, RKT Merger Co., Video Giant
                 Inc. and the Stockholders named therein, dated as of January 11, 1996
    +10.11   --  Asset Purchase Agreement by and between the Registrant and Video Innovators,
                 Inc., dated as of January 11, 1996
    +10.12   --  Asset Purchase Agreement by and among the Registrant, Video Video of
                 Westfield, Inc., Video Video of Parsippany, Inc., Video Video of Chatham,
                 Inc. and Harold Rosenbaum, dated as of January 11, 1996, and the first
                 amendment thereto dated February 19, 1996
    +10.13   --  Asset Purchase Agreement by and among the Registrant, Video Video of
                 Livingston, Inc., Harold Rosenbaum and Alan Kass, dated as of January 11,
                 1996, and the first amendment thereto dated February 19, 1996
    +10.14   --  Form of Standard Franchise Agreement, pursuant to which existing franchisees
                 of the Registrant (excluding those to be acquired upon closing of the
                 transactions contemplated by the Palmer Merger Agreement) currently operate
    +10.15   --  Form of Standard Franchise Agreement to be executed between the Registrant
                 and future franchisees
    +10.16   --  Form of Standard Franchise Agreement pursuant to which existing franchisees
                 of Palmer Corporation currently operate
    +10.17   --  Lease between the Registrant and Elliot Stone for office space located at
                 9990 Global Road, Philadelphia, Pennsylvania, dated as of July 12, 1995, as
                 amended
    +10.18   --  Lease between the Registrant and Elliot Stone for warehouse space located at
                 490 Red Lion Road, Philadelphia, Pennsylvania dated as of July 12, 1995, as
                 amended
   *+10.19   --  1995 Equity Incentive Plan, and amendment thereto
   *+10.20   --  1995 Director Stock Option Plan
   *+10.21   --  1995 Employee Stock Purchase Plan
   *+10.22   --  Employment Agreement between the Registrant and Jules E. Gardner, dated May
                 26, 1995
   *+10.23   --  Employment Agreement between the Registrant and Kenneth R. Graffeo, dated May
                 26, 1995
   *+10.24   --  Employment Agreement between the Registrant and Jerry L. Misterman, dated May
                 26, 1995
   *+10.25   --  Form of Employment Agreement between the Registrant and Peter Balner
    +10.29   --  Stockholders Voting Agreement among Resource Holdings Inc., T. Kyle Standley,
                 Ralph W. Standley, III and M. Trent Standley dated July 12, 1995
    +10.30   --  Shareholders Agreement among T. Kyle Standley, Ralph W. Standley, III, M.
                 Trent Standley, the Ralph W. Standley III Irrevocable Trust dated May 18,
                 1995 and certain "Investors" in the Company named therein, dated July 12,
                 1995
    +10.31   --  Convertible Promissory Note made by the Registrant and its subsidiaries in
                 favor of West Coast Video Enterprises, Inc. dated July 12, 1995 (the
                 "Convertible Note")
    +10.32   --  Non-Convertible Promissory Note made by the Registrant and its subsidiaries
                 in favor of West Coast Video Enterprises, Inc. dated July 12, 1995
    +10.33   --  Letter Agreement dated July 12, 1995 between the Registrant and West Coast
                 Video Enterprises, Inc. regarding payment of the Convertible Note
</TABLE>
 
                                       49
<PAGE>   50
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                            DESCRIPTION
----------       -----------------------------------------------------------------------------
<S>              <C>
    +10.34   --  Letter Agreement regarding the payment of a fee to West Coast Video
                 Enterprises, Inc., West Coast Entertainment, Inc., West Coast Services, Inc.,
                 Game Power Headquarters, Inc., Premier Advertising, Inc., Jules Gardner and
                 Kenneth Graffeo upon the purchase by West Coast Franchising Company of
                 Existing Franchises dated July 12, 1995
    +10.35   --  Non-Competition Agreement between the Registrant and Elliot Stone dated July
                 12, 1995
    +10.36   --  Revolving Credit and Term Loan Agreement by and between the Registrant and
                 its subsidiaries and PNC Bank, National Association dated as of July 12, 1995
    +10.37   --  Revolving Credit Note made by the Registrant and its subsidiaries in favor of
                 PNC Bank, National Association, dated as of July 12, 1995
    +10.38   --  Third Amendment to Credit Agreement as of December 15, 1998

</TABLE>
 
                                       50
<PAGE>   51
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                            DESCRIPTION
----------       -----------------------------------------------------------------------------
<C>         <C>  <S>
     +21.1   --  Subsidiaries of the Registrant
      23.1   --  Consent of PricewaterhouseCoopers LLP
        27   --  Financial Data Schedule
</TABLE>
 
---------------
     * Management contract or compensatory plan or arrangement required to be
       filed as an exhibit to this Annual Report on Form 10-K.
 
     (c) Reports on Form 8-K
 
     The Registrant filed a Current Report on Form 8-K, dated November 15, 1996,
as amended by a Current Report on Form 8-K/A, pursuant to which it reported its
acquisition of the assets of several unaffiliated entities engaged in the retail
video rental and sale business under Item 2 of Form 8-K. No financial statements
were required to be filed in connection with such Current Report.
 
The Registrant filed a Current Report on Form 8-K reporting on Item 8 Change in
fiscal year on May 15, 1998.

The Registrant filed a Current Report on Form 8-K reporting on Item 4 Changes
Registrant's certifying Accountant on November 20, 1998, reporting the
termination of PricewaterhouseCoopers LLP.

The Registrant filed a Current Report on Form 8-K reporting on Item 4 Changes
Registrant's certifying Accountant on January 31, 1999, reporting the selection
and appointment of BDO Seidman, LLP.

The Registrant filed a Current Report on Form 8-K reporting on Item 5 the third
amendment to Credit Agreement on January 27, 1999, reporting amendments
effective January 12, 1999 to the existing Credit Agreement.

                                       51