-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Etan+eHdJLXfUtvdy20qkEe1EXczm4RJWbK6sluw3nzqVjNplabb31u+3CVJpyap pAd8jCWuo1AnJw55+KNBtQ== 0001021408-01-511551.txt : 20020413 0001021408-01-511551.hdr.sgml : 20020413 ACCESSION NUMBER: 0001021408-01-511551 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20011219 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIDEO CITY INC CENTRAL INDEX KEY: 0000773135 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-VIDEO TAPE RENTAL [7841] IRS NUMBER: 953897052 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14023 FILM NUMBER: 1817616 BUSINESS ADDRESS: STREET 1: 4800 EASTON DR SUITE 108 CITY: BAKERSFIELD STATE: CA ZIP: 93309 BUSINESS PHONE: 6616349171 MAIL ADDRESS: STREET 1: 4800 EASTON DR SUITE 108 CITY: BAKERSFIELD STATE: CA ZIP: 93309 FORMER COMPANY: FORMER CONFORMED NAME: PRISM ENTERTAINMENT CORP DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt QUARTERLY REPORT ENDED 10/31/01 ================================================================================ United States SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________ Form 10-Q ___________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2000 ---------------- [_] 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. 0-14023 VIDEO CITY, INC. (Exact name of registrant as specified in its charter) Delaware 95-3897052 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 4800 Easton Drive, Suite 108, Bakersfield, California 93309 (Address of principal executive offices) (Zip Code) ___________ Registrant's telephone number, including area code: (661) 634-9171 ________________________________________________________________________________ Page 1 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes --- No --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. The number of shares of Common Stock outstanding as of December 12, 2001 was 16,442,662. ________________________________________________________________________________ Page 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements VIDEO CITY, INC. DEBTOR-IN-POSSESSION CONSOLIDATED BALANCE SHEETS
October 31, January 31, 2000 2000 ----------- ----------- (Unaudited) ASSETS Current assets: Cash .................................................................... $ 626,945 $ 24,316 Customer receivables .................................................... 512,314 1,003,578 Notes receivable ........................................................ -- 9,078 Merchandise inventory ................................................... 2,919,040 3,767,919 Other ................................................................... 541,517 75,000 ----------- ----------- Total current assets ................................................. 4,599,816 4,879,891 Rental library, net ....................................................... 4,389,146 6,223,364 Property and equipment, net ............................................... 2,564,286 4,266,665 Goodwill .................................................................. 3,230,153 4,920,303 Other assets .............................................................. 886,299 1,003,564 ----------- ----------- Total assets ......................................................... $15,669,700 $21,293,787 =========== ===========
See accompanying notes to consolidated financial statements ________________________________________________________________________________ Page 3 VIDEO CITY, INC. DEBTOR-IN-POSSESSION CONSOLIDATED BALANCE SHEETS
October 31, January 31, 2000 2000 -------------- ------------- Unaudited LIABILITIES NOT SUBJECT TO COMPROMISE Current liabilities: Accounts payable ............................................................... $ 139,352 $ 23,033,955 Accrued Expenses ............................................................... 1,022,366 3,069,765 Senior secured revolving credit facility ....................................... -- 9,769,574 Current portion of long-term debt .............................................. -- 5,565,078 ------------ ------------ Total current liabilities ................................................... 1,161,718 41,438,372 Long-term debt, less current portion ............................................. -- 1,231,907 Other liabilities .............................................................. 99,456 99,456 ------------ ------------ Total liabilities Not Subject to Compromise ...................................... 1,261,174 42,769,735 ------------ ------------ LIABILITIES SUBJECT TO COMPROMISE Accounts payable ................................................................. 26,937,085 -- Senior secured revolving credit facility ......................................... 10,521,387 -- Notes payable .................................................................... 6,790,454 -- Accrued interest ................................................................. 1,004,342 -- Other liabilities ................................................................ 2,191,501 -- ------------ ------------ Total Liabilities Subject to Compromise ..................................... 47,444,769 -- ------------ ------------ Total Liabilities ................................................................ 48,705,943 42,769,735 Stockholders' deficit: Preferred stock ................................................................ 6,292,135 6,217,135 Common stock, $.01 par value per share, 30,000,000 shares authorized; 16,442,662 shares issued and outstanding at October 31, 2000 and 15,767,959 shares issued and outstanding at January 31, 2000 .................. 164,427 157,679 Additional paid-in capital ..................................................... 13,576,968 13,268,548 Accumulated deficit ............................................................ (53,069,773) (41,119,310) ------------ ------------ Total stockholders' deficit ................................................. (33,036,243) (21,475,948) ------------ ------------ Total liabilities and stockholders' deficit ...................................... $ 15,669,700 $ 21,293,787 ============ ============
See accompanying notes to consolidated financial statements _______________________________________________________________________________ Page 4 VIDEO CITY, INC. DEBTOR - IN - POSSESSION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended October 31, October 31, October 31, October 31, 2000 1999 2000 1999 ------------- ------------- -------------- ------------- REVENUES: Rental revenues and product sales ........................... $ 5,808,282 $ 8,723,038 $ 21,672,312 $ 36,241,069 Management fee income ....................................... 998,826 -- 3,522,656 -- ------------ ------------ ------------ ------------ TOTAL REVENUES ................................................ 6,807,108 8,723,038 25,194,968 36,241,069 ------------ ------------ ------------ ------------ OPERATING COSTS AND EXPENSES: Store operating expenses .................................... 3,855,825 5,849,472 13,012,773 22,905,007 Amortization of rental library .............................. 1,872,009 928,953 6,903,956 4,434,986 Cost of product sales ....................................... 816,509 2,140,979 3,512,018 6,496,760 Cost of leased product ...................................... 343,540 1,562,097 1,192,068 3,713,689 Restructuring ............................................... -- -- 1,564,000 -- General and administrative expenses ......................... 2,547,787 2,722,220 7,059,423 8,174,237 Store Closure Expenses ...................................... -- 1,345,400 -- 1,345,400 ------------ ------------ ------------ ------------ TOTAL OPERATING COSTS AND EXPENSES ............................ 9,435,670 14,549,121 33,244,238 47,070,079 Loss from operations before reorganization items............... (2,628,562) (5,826,083) (8,049,270) (10,829,010) Other (Income) expense (Gain) Loss on sale of assets ............................... -- 383,384 -- (1,529,794) Interest expense, net (contractual interest $552,000 and $1,758,000) ............................................. 141,137 462,100 1,347,254 1,744,862 Other ....................................................... (15,586) (21,696) (26,157) (76,432) ------------ ------------ ------------ ------------ Loss before reorganization items and income taxes ............. (2,754,113) (6,649,871) (9,370,367) (10,967,646) Reorganization items Professional fees ........................................... 104,000 -- 104,000 -- (Gain) Loss on sale of assets ............................... 1,954,581 -- 2,153,954 -- ------------ ------------ ------------ ------------ Loss Before Income Taxes ...................................... (4,812,694) (6,649,871) (11,628,321) (10,967,646) Income tax benefit ............................................ -- -- -- (546,603) ------------ ------------ ------------ ------------ Net Loss ...................................................... (4,812,694) (6,649,871) (11,628,321) (10,421,043) ============ ============ ============ ============ Dividends on preferred stock .................................. -- (152,000) (322,142) (266,037) ------------ ------------ ------------ ------------ Net loss applicable to common shareholders .................... $ (4,812,694) $ (6,801,871) $(11,950,463) $(10,687,080) ============ ============ ============ ============ Loss per common share data: Basic and Diluted Loss Per Share ........................... $ (0.29) $ (0.46) $ (0.73) $ (0.76) Weighted average number of common shares outstanding Basic and Diluted .......................................... 16,442,662 14,823,823 16,268,843 14,152,717
See accompanying notes to consolidated financial statements - -------------------------------------------------------------------------------- Page 5 VIDEO CITY, INC. DEBTOR - IN - POSSESSION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended October 31, October 31, 2000 1999 Increase (Decrease) in cash Cash flows from operating activities: Net Loss ............................................................. $(11,628,321) $(10,421,043) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ...................................... 8,508,961 5,974,897 Increase in net deferred tax asset ................................. -- (546,603) Issuance of stock for services and inventory ....................... 187,500 2,908,582 (Gain) Loss on sale of asset ....................................... 2,153,954 (1,529,802) Changes in assets and liabilities, net of effects of acquisitions: Decrease (increase) in customer receivables ........................ 491,264 (969,814) Decrease in notes receivable ....................................... 9,078 (9,506) Decrease (increase) in merchandise inventories ..................... 848,879 (2,480,269) Increase in other assets ........................................... (426,417) (1,060,015) Increase in accounts payable ....................................... 3,923,008 8,629,521 Increase (decrease) in accrued expenses ............................ 1,148,444 (2,724,563) Decrease in other liabilities ...................................... -- (263,934) ------------ ------------ Net cash provided by (used in) operating activities .................. 5,216,350 (2,492,549) ------------ ------------ Cash flows from investing activities: Purchases of videocassette rental library .......................... (5,705,372) (6,217,385) Purchases of fixed assets .......................................... (162,391) (2,413,732) Repayment on note receivable ....................................... -- 1,228,000 Store acquisitions ................................................. -- (167,036) Proceeds from sale of assets ....................................... -- 13,863,000 Proceeds from sale of assets after Chapter 11 filing ............... 508,760 -- ------------ ------------ Net cash provided by (used) in investing activities .................. (5,359,003) 6,292,847 ------------ ------------ Cash flows from financing activities: Repayment of long-term debt ........................................ (6,531) (356,599) Proceeds from issuance of long-term debt ........................... -- 2,015,979 Proceeds from issuance of preferred stock .......................... -- 625,000 Proceeds from borrowings (repayments) under credit facility ........ 751,813 (6,085,390) Cash payments made in conversion of preferred stock ................ -- (188,325) Proceeds from exercising options and warrants ...................... -- 45,712 ------------ ------------ Net cash provided by (used in) financing activities .................. 745,282 (3,943,623) ------------ ------------ Net increase (decrease) in cash ...................................... 602,629 (143,325) Cash at beginning of period ......................................... 24,316 172,043 ------------ ------------ Cash at end of period ................................................ $ 626,945 $ 28,718 ============ ============
See accompanying notes to consolidated financial statements ________________________________________________________________________________ Page 6 VIDEO CITY, INC. DEBTOR - IN - POSSESSION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended October 31, October 31, 2000 1999 --------- ----------- Supplementary disclosures of cash flow information Cash Paid For: Interest .................................................................. $ 651,225 $ 1,174,777 Income taxes .............................................................. -- 17,924 Reorganization items ...................................................... 104,000 -- Non-cash investing and financing activities: Common Stock issued for professional services ............................. 112,500 2,908,582 Preferred stock issued in satisfaction of liabilities ..................... 75,000 1,187,334 Note receivable from sale of assets ....................................... -- 830,000 Preferred stock dividends ................................................. 322,142 266,037 For acquisitions consummated during the Nine months ended October 31, 1999, the Company paid $167,036, net of cash acquired. In conjunction with the 1999 acquisitions, liabilities were assumed as follows: Fair value of assets acquired ............................................... $ 1,614,929 Cash paid ................................................................... (167,036) Common stock issued ......................................................... (641,394) Preferred stock issued ...................................................... (1,251,174) Goodwill .................................................................... 4,172,469 ----------- Liabilities assumed ....................................................... $ 3,727,794 ===========
See accompanying notes to consolidated financial statements. ________________________________________________________________________________ Page 7 VIDEO CITY, INC. DEBTOR - IN - POSSESSION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Financial Statement Presentation The accompanying consolidated financial statements include the accounts of Video City, Inc. ("the Company") and all of its wholly owned subsidiaries. These subsidiaries include Old Republic Entertainment, Inc., Sulpizio One, Inc., Video Tyme, Inc., Videoland, Inc., and Video Galaxy, Inc. All material intercompany transactions have been eliminated. The financial statements include the operations of companies acquired from the dates of acquisition. The consolidated balance sheet as of October 31, 2000, the consolidated statement of operations for the three and nine months ended October 31, 2000 and 1999, and the consolidated statement of cash flows for the nine months ended October 31, 2000 are unaudited and have been prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. The financial statements have been prepared using accounting principles applicable to a going concern, which assumes realization of assets and settlement of liabilities in the normal course of business. The appropriateness of using the going concern basis is dependent upon, among other things, the ability to comply with debtor-in-possession financing agreements, confirmation of a plan of reorganization, the ability to achieve profitable operations, and the ability to generate sufficient cash flow from operations to meet its obligations. The accompanying interim consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position as of October 31, 2000, the results of operations for the three and nine months ended October 31, 2000 and 1999, and cash flows for the nine months ended October 31, 2000 and 1999. All such adjustments are of a normal and recurring nature. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the prior year financial statements to conform with the current year presentation. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended January 31, 1999. ________________________________________________________________________________ Page 8 The accompanying unaudited consolidated balance sheet as of October 31, 2000 segregates liabilities subject to compromise, such as unsecured claims, from liabilities not subject to compromise, such as fully secured liabilities and liabilities arising subsequent to filing bankruptcy. A plan of reorganization could materially change the amounts currently recorded in the consolidated financial statements. The consolidated statements that might result from the outcome of this uncertainty may be materially different that those presented herein. Reorganization items represent expenses incurred by the Company as a result of the bankruptcy filing and proceedings, which are required to be expensed as incurred. 2. Restructuring Costs The Company incurred $1.6 million in restructuring costs during the period ending October 31, 2000, consisting of severance obligations to employees, lease liability for the former executive offices in Torrance, California, and non-cash write down of the related leasehold improvements. These costs are related to the Company's effort to improve the performance of its operations and streamline its corporate expenses after entering into the Management Agreement and in anticipation of the proposed merger between the Company and West Coast Entertainment Corporation. 3. Bankruptcy On August 17, 2000, Fleet Retail Finance purported to accelerate the outstanding indebtedness under the Company's secured credit facility with Fleet Retail Finance. Fleet Retail Finance also initiated an action in the Massachusetts State Court to recover the sums allegedly due under the credit facility and obtained a temporary order requiring that the Company deposit its cash receipts into designated Fleet Retail Finance accounts. Additionally, the Company filed a complaint against Fleet Retail Finance and certain other defendants seeking damages in excess of $25.0 million. The Complaint alleges fraud, breach of contract, breach of the covenant of good faith and fair dealing, intentional interference with contractual relations, intentional interference with advantageous relations, violation of ________________________________________________________________________________ Page 9 . the Racketeer Influenced and Corrupt Organizations Act and violation of applicable provisions of Massachusetts state law. The Company also filed a motion to vacate the temporary order obtained by Fleet Retail Finance and to restrain Fleet Retail Finance from sweeping the cash from the Company's depository accounts, which are used to fund operations and payroll. On August 22, 2000 the Massachusetts court directed Fleet Retail Finance to release enough funds to cover payroll. On August 24, 2000, as a result of Fleet Retail Finance action to accelerate payment of the outstanding indebtedness under the Company's secured credit facility, the Company and its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. The company retained possession of its properties and assets and continued to operate with its existing directors and officers as a Debtor-in-Possession ("DIP"). As Debtors-in-Possession, the Company is authorized to operate its business, but may not engage in transactions outside of the normal course of business without approval, after notice and hearing, of the Bankruptcy Court. Pursuant to the provisions of the Bankruptcy Code, as of the petition date actions to collect pre-petition indebtedness owed by the Company are stayed and other pre-petition contractual obligations may not be enforced against the Company. In addition, as debtors-in-possession, the Company has the right, subject to the Bankruptcy Court's approval and certain other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties affected by these rejections may file claims with the Bankruptcy Court in accordance with the reorganization process. Accordingly, these obligations have been included as liabilities subject to compromise. The Bankruptcy Court approved payment of certain pre-petition liabilities such as employee expenses and benefits. The Bankruptcy Court also allowed for the retention of legal and financial professionals. The items are recorded as accounts payable and accrued expenses not subject to compromise. 4. Divestiture of Stores ________________________________________________________________________________ Page 10 On September 27, 2000 the Company obtained approval from the United States Bankruptcy Court to reject the leases on 17 under performing store locations and liquidate the assets. The assets were sold to Video One Liquidators at the aggregate net liquidation price of $508,760. The company recognized loss on sale of approximately $2.2 million during the third quarter ended October 31, 2000, which is included in the reorganization items. 5. Earnings Per Share Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that then share in earnings. Common stock options, warrants, and preferred stock were not included in the computations of diluted earnings per share because the effect of exercise and/or conversion would have an antidilutive effect on earnings per share. 6. Use of Estimates In addition to the uncertainties related to the Chapter 11 proceedings, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 7. Subsequent Events ________________________________________________________________________________ Page 11 Effective February 13, 2001, West Coast Entertainment director's informed the Company that they were terminating the "Management Agreement" effective immediately, due to the sale of substantially all West Coast Entertainment's remaining 56 Stores and various other assets to Video One Liquidators. In February 2001, the Company relocated its corporate offices from 9998 Global Road, 2nd Floor, Philadelphia, Pennsylvania, 19115 to 4800 Easton Drive, Suite 108, Bakersfield, California. The Company and Fleet Retail Finance entered into an agreement ("the Fleet Compromise"), which was approved by the Court on March 28, 2001. The salient terms of the agreement granted Fleet Retail Finance an allowed claim in the amount of $10,000,000. In full satisfaction of the claim, the Company agreed to make two payments consisting of $1,500,000. The first payment of $1,000,000 was paid on March 28, 2001, which resulted in partial satisfaction of the Allowed Fleet Claim and the second payment of $500,000 on June 29, 2001 resulted in the full satisfaction of the Allowed Fleet Claim. In addition, both parties jointly dismissed the State Court Action with prejudice and Fleet Retail Finance and the Company simultaneously executed a mutual release of any and all claims against the directors, officers, employees and other representatives of each company. On July 30, 2001, the Bankruptcy Court entered an Order confirming Video City's First Amended Chapter 11 Plan of Reorganization (the "Plan"). The Plan became effective on August 29, 2001. Pursuant to the Plan, the existing common shareholders of Video City are to receive 700,000 shares of common stock of Reorganized Video City (10% of the outstanding shares) for pro rata distribution; 700,000 shares are to be issued to preferred shareholders; and 5,600,000 shares are to be issued to Video City's creditors. The Company anticipates that approximately all liabilities subject to compromise will receive in full satisfaction of their claims through shares of common stock of Video City based on the Plan of Reorganization. As part of the plan certain class 4A creditor's had the option to receive 20% of their claim in cash if their claim was under $1,000 or if they choose to reduce their claim to that amount. The total amount for all class 4A creditors who opted for the cash payout was less than $22,000. In addition, certain liabilities subject to compromise consist of tax obligations that are to be paid in cash over five years from date of assessment ________________________________________________________________________________ Page 12 The Company will issue 7,000,000 shares of new common stock of reorganized Video City upon completion of the Company's past SEC filings on forms 10Q and 10K and completion of the audit and reviews of the Company's financial statements by it's independent certified public accountants. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Special Note Regarding Forward Looking Statements Certain statements in this Quarterly Report on Form 10-Q, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). 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. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein and in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2000. As described in Note 1 to the unaudited consolidated financial statements, the Company filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code on August 24, 2000. Results of Operations Three months and nine months ended October 31, 2000 compared to the three months and nine months ended October 31, 1999. Revenues Rental revenue and product sales for the three months and nine months ended October 31, 2000 totaled $5.8 million and $21.7 million compared to $8.7 million and $36.2 million for the three and nine months ended October 31, ________________________________________________________________________________ Page 13 1999. Revenue decreased by $2.9 million or 33% and $14.5 million or 40% for the three months and nine months ended October 31, 2000 as compared to the corresponding periods of the previous year. The decreased revenues were primarily attributable to the liquidation and closing of 22 stores during this quarter and the previous quarter. As of October 31, 2000, the Company was operating 55 stores in 10 states compared to 77 stores in 10 states at October 31, 1999. In addition, the Company was operating in Chapter 11 Bankruptcy for nearly the entire quarter, which reduced the working capital available for product purchases. The Company had management fee income of $1.0 million and $3.5 million for the three and nine months ended October 31, 2000, related to the "Management Agreement" entered into with West Coast Entertainment Corporation on March 3, 2000 and terminated on February 13, 2001. The Company had no management fee income for the three and nine months ended October 31, 1999. Store Operating Expenses Store operating expenses for the three months and nine months ended October 31, 2000 totaled $3.9 million and $13.0 million, as compared to $5.8 million and $22.9 million for the three months and nine months ended October 31, 1999. Store operating expenses decreased by $1.9 million or 33% and $9.9 million or 43% for the three months and nine months ended October 31, 2000 as compared to the corresponding periods of the previous year. The decrease in store operating expenses was primarily due to the liquidation and closing of 22 stores this quarter and the previous quarter. In addition, due to operating in Chapter 11 Bankruptcy the store expenses were reduced to minimum levels to preserve cash. Store operating expenses as a percentage of rental revenues and product sales were 67% and 60% for the three months and nine months ended October 31, 2000 compared to 67% and 63% for the corresponding periods of 1999. Amortization of Videocassette Rental Inventory Amortization of videocassette rental inventory for the three months and nine months ended October 31, 2000 totaled $1.9 million and $6.9 million, compared to $0.9 million and $4.4 million for the three months and nine months ended October 31, 1999. Amortization increased by $1.0 million or 111% and $2.5 million or 57% for the three months and nine months ended October 31, 2000 as compared to the corresponding periods of the previous year. On ________________________________________________________________________________ Page 14 January 2000 the Company adopted an accelerated method of amortizing its rental inventory. Based on the new amortization method, the Company amortizes base stock (copies 1-3) on an accelerated basis over three months to $8, with the remaining base stock cost amortized on a straight line basis over 33 months to a salvage value of $3. The cost of non base stock (generally greater than 3 copies per title per store) are amortized on an accelerated basis over three months to an estimated $3 salvage value. Amortization of videocassette rental inventory as a percentage of rental revenues and product sales were 33% and 32% for the three months and nine months ended October 31, 2000 compared to 10% and 12% for the corresponding period of 1999. In addition, the increase was partially due to the Company not leasing product under studio revenue sharing agreements due to the Chapter 11 filing. This was partially offset by the liquidation and closing of 22 stores. Cost of Product Sales Cost of product sales for the three months and nine months ended October 31, 2000 totaled $0.8 million and $3.5 million, compared to $2.1 million and $6.5 million for the three months and nine months ended October 31, 1999. Cost of product sales decreased by $1.3 million or 62% and $3.0 million or 46% for the three months and nine months ended October 31, 2000 as compared to the corresponding periods of the previous year. The decrease in the cost of product sales for the three months and nine months ended October 31, 2000 was primarily due to the liquidation and closing of 22 stores this quarter and the previous quarter. In addition, the Company lacked proper working capital during the fiscal year to purchase adequate sell thru products. Cost of product sales as a percentage of rental revenues and product sales, was 14% and 16% for the three months and nine months ended October 31, 2000, compared to 24% and 18% for the same period of 1999. Cost of Leased Product Cost of leased product for the three months and nine months ended October 31, 2000 totaled $0.3 million and $1.2 million, compared to $1.6 million and $3.7 million for the three months and nine months ended October 31, 1999. Cost of leased products decreased by $1.3 million or 81% and $2.5 million or 68% for the three months and nine months ended October 31, 2000 as compared to the corresponding periods of the previous year. Cost of leased ________________________________________________________________________________ Page 15 product as a percentage of rental revenues and product sales, was 5% and 6% for the three months and nine months ended October 31, 2000, compared to 18% and 10% for the same period of 1999. The decrease was primarily due to the Company not leasing product under studio revenue sharing agreements beginning August 24, 2000 due the Chapter 11 Bankruptcy filing. The decrease was also attributable to a reduction in the number of stores this period as opposed to last year. Restructuring Costs The Company incurred $1.6 million in restructuring costs during the nine months ending October 31, 2000, consisting of severance obligations to employees, lease liability for the former executive offices in Torrance, California, and a non-cash write down of the related leasehold improvements. These costs are related to the Company's effort to improve the performance of its operations and streamline its corporate expenses after entering into the Management Agreement and in anticipation of the proposed merger between the Company and West Coast Entertainment Corporation. General and Administrative Expenses General and administrative expenses for the three months and nine months ended October 31, 2000 totaled $2.5 million and $7.1 million, compared to $2.7 million and $8.2 million for the three months and nine months ended October 31, 1999. General and administrative expenses decreased by $0.2 million or 7% and $1.1 million or 13% for the three months and nine months ended October 31, 2000 as compared to the corresponding periods of the previous year. The decrease in general and administrative expenses was primarily attributable to the company reduction in employee salaries and related cost savings that resulted from the moving of the Company's corporate headquarters from Torrance, California to Philadelphia, Pennsylvania in March 2000. General and administrative expenses as a percentage of total revenues were 43% and 33% for the three months and nine months ended October 31, 2000, compared to 31% and 23% for the same period in 1999. Store Closure Expenses ________________________________________________________________________________ Page 16 During September and October of 1999, the Company closed 13 under-performing stores and incurred $1.3 million of store closure expenses. The majority of expenses associated with the closure of these stores included rent, utilities, field management, inventory transfer and payroll expenses. Interest Expense Interest Expense for the three months and nine months ended October 31, 2000 totaled $0.1 million and $1.3 million, compared to $0.5 million and $1.7 million for the three and nine months ended October 31, 1999. The decrease in interest expense is reflective of a decreased average balance of borrowings as well as the discontinuance of recording interest expense on unsecured and partially secured prepetition debt subject to compromise. Income Taxes Statement of Financial Accounting Standards No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets of a Company will not be realized. Accordingly, a full valuation allowance has been established against the deferred tax asset at October 31, 2000. Liquidity and Capital Resource Under Chapter 11, actions to enforce certain claims against the Company are stayed if the claims arose, or are based on, events that occurred on or before the petition date of August 24, 2000. The ultimate terms of settlement of these claims will be determined in accordance with a plan of reorganization, which requires the approval of the impaired prepetition creditors and shareholders and confirmation by the Bankruptcy Court. Additional claims may arise subsequent to the filing of the Chapter 11 petitions resulting from further rejection of certain executory contracts and unexpired leases and from the determination by the Court (or agreed to by the parties in interest) of allowed claims for contingencies and other disputed amounts. The ultimate resolution of such liabilities, all of which are subject to compromise, will be part of a plan of reorganization. ________________________________________________________________________________ Page 17 Until the Bankruptcy Court confirms a plan of reorganization, only such payments on prepetition obligations that are approved or required by the Bankruptcy Court will be made. Except for payments for property and equipment under lease, principal and interest payments on prepetition debt have not been made since the filing date and will not be made without the Bankruptcy Court's approval or until a plan or reorganization, defining the repayment terms, has been confirmed by the Bankruptcy Court. There is no assurance at this time that a plan of reorganization will be proposed by the Company or if a proposed plan will be approved or confirmed by the Bankruptcy Court. The Company funds its short-term working capital needs, including the purchase of videocassettes and other inventory, primarily through cash from operations. The Company expects that cash from operations will be sufficient to fund future videocassette and other inventory purchases and other working capital needs for its existing stores. Inherent in a successful plan of reorganization is a capital structure which permits the Company to generate sufficient cash flow after reorganization to meet its restructured obligations and fund the current obligations of the reorganized Company. Under the Bankruptcy Code, the rights of and ultimate payment to prepetition creditors may be substantially altered and, as to some classes, eliminated. At this time, it is not possible to predict the outcome of the Chapter 11 filing, in general, or its effects on the business of the Company or on the interests of creditors or shareholders. The Company believes that the sources of capital described above and internally generated funds will be adequate to meet the Company's anticipated needs through fiscal 2001; however as a result of the Company's Chapter 11 proceedings and its other events described above, no assurance can be given with respect to the Company's liquidity. During the Debtor-in-Possession period the Company's supply vendors require all purchases of inventory be made only by cash in advance. There can be no assurance, however, that future cash from operations will be sufficient to fund future videocassette and inventory purchases. Page 18 Videocassette rental inventories are accounted for 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 a substantial portion of the Company's revenue, the classification of these assets as noncurrent excludes them from the computation of working capital. The acquisition cost of videocassette rental inventories, however, is reported as a current liability until paid and, accordingly, included in the computation of working capital. Consequently, the Company believes working capital is not as significant a measure of financial condition for companies in the video retail industry as it is for companies in other industries. Because of the accounting treatment of videocassette rental inventory as a noncurrent asset, the Company anticipates that it will operate with a working capital deficit during the fiscal year ended January 31, 2001. On July 30, 2001, the Bankruptcy Court entered an Order confirming Video City's First Amended Chapter 11 Plan of Reorganization (the "Plan"). The Plan became effective on August 29, 2001. Pursuant to the Plan, the existing common shareholders of Video City are to receive 700,000 shares of common stock of Reorganized Video City (10% of the outstanding shares) for pro rata distribution; 700,000 shares are to be issued to preferred shareholders; and 5,600,000 shares are to be issued to Video City's creditors. The Company anticipates that approximately all liabilities subject to compromise will receive in full satisfaction of their claims through shares of common stock of Video City based on the Plan of Reorganization. As part of the plan certain class 4A creditor's had the option to receive 20% of their claim in cash if their claim was under $1,000 or if they choose to reduce their claim to that amount. The total amount for all class 4A creditors who opted for the cash payout was less than $22,000. In addition, certain liabilities subject to compromise consist of tax obligations that are to be paid in cash over five years from date of assessment. Cash Flows Nine months Ended October 31, 2000 Compared to the Nine months Ended October 31, 1999 The increase in net cash provided by operating activities of $7.7 million for the nine months ended October 31, 2000 compared to the nine months ended October 31, 1999 was primarily due to an increase in accrued expenses and accounts payable and a decrease in merchandise inventories, partially offset by an increase in other assets. Net cash Page 19 used in investing activities increased by $11.7 million for the nine months ended October 31, 2000 compared to the nine months ended October 31, 1999 primarily due to a decrease in the proceeds from sale of assets and a decrease in purchases of videocassette rental inventory and fixed assets resulting from the reduction in the number of stores. Net cash provided by financing activities decreased $4.7 million for the nine months ended October 31, 2000 compared to the nine months ended October 31, 1999 primarily due to increased borrowings under the credit facility. 3. Quantitative and Qualitative Disclosure About Market Risk The Company's market risk sensitive instruments do not subject it to material market risk exposures, except for such risks related to interest rate fluctuations. The Company discontinued recording interest expense on unsecured and partially secured prepetition debt subject to compromise. PART II. OTHER INFORMATION Item 1. Legal Proceedings On August 17, 2000, Fleet Retail Finance purported to accelerate the outstanding indebtedness under the Company's secured credit facility with Fleet Retail Finance. Fleet Retail Finance also initiated an action in the Massachusetts State Court to recover the sums allegedly due under the credit facility and obtained a temporary order requiring that the Company deposit its cash receipts into designated Fleet Retail Finance accounts. Additionally, the Company filed a complaint against Fleet Retail Finance and certain other defendants seeking damages in excess of $25,000,000. The Complaint alleges fraud, breach of contract, breach of the covenant of good faith and fair dealing, intentional interference with contractual relations, intentional interference with advantageous relations, violation of the Racketeer Influenced and Corrupt Organizations Act and violation of applicable provisions of Massachusetts state law. The Company also filed a motion in the Massachusetts State Court to vacate the temporary order obtained by Fleet Retail Finance and to restrain Fleet Retail Finance from sweeping the cash from the Company's depository accounts, Page 20 which are used to fund operations and payroll. On August 22, 2000 the Massachusetts court directed Fleet Retail Finance to release enough funds to cover payroll. On August 24, 2000, as a result of Fleet Retail Finance Retail action to accelerate payment of the outstanding indebtedness under the Company's secured credit facility, the Company and its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. The company is in possession of its properties and assets and continues to operate with its existing directors and officers as a Debtor-in-Possession. As debtors-in-possession, the Company is authorized to operate its business, but may not engage in transactions outside of the normal course of business without approval, after notice and hearing, of the Bankruptcy Court. The Company and Fleet Retail Finance entered into an agreement ("the Fleet Compromise"), which was approved by the Court on March 28, 2001. The salient terms of the agreement granted Fleet Retail Finance an allowed claim in the amount of $10.0 million. In full satisfaction of the claim, the Company agreed to make two payments consisting of $1.5 million. The first payment of $1.0 million was paid on March 28, 2001, which resulted in partial satisfaction of the Allowed Fleet Claim and the second payment of $0.5 million on June 29, 2001 resulted in the full satisfaction of the Allowed Fleet Claim. In addition, both parties jointly dismissed the State Court Action with prejudice and Fleet Retail Finance and the Company simultaneously executed a mutual release of any and all claims against the directors, officers, employees and other representatives of each company. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities The Company operated under certain forbearance agreements with their Senior Lender, Fleet Retail Finance (formerly Bank Boston), during the quarter ended October 31, 2000 and were not in compliance with the financial performance covenants as set forth in the forbearance agreements. Page 21 Pursuant to the provisions of the Bankruptcy Code, as of the petition date actions to collect pre-petition indebtedness owed by the Company are stayed and other pre-petition contractual obligations may not be enforced against the Company. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits None (b) Reports on Form 8-K On August 24, 2000, the Company filed a current report on form 8-K, dated August 24, 2000, to report under Item 3 that the Company filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Page 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Video City, Inc --------------- (Registrant) December 19, 2001 /s/ Timothy L. Ford ------------------- Timothy L. Ford Chief Executive Officer (Principal Executive Officer) --------------------------- December 19, 2001 /s/ Rudolph R. Patino --------------------- Rudolph R. Patino Chief Financial Officer (Principal Financial Officer) --------------------------- Page 23 -----END PRIVACY-ENHANCED MESSAGE-----