<PAGE>
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 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
incorporation or organization) Identification No.)
370 Amapola Avenue, Suite 208, Torrance, California 90501
(Address of principal executive offices) (Zip Code)
(310) 533-3900
(Registrant's telephone number, including area code)
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 X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at December 17, 1999
- ----- --------------------------------
Common Stock 15,215,255
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
VIDEO CITY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31,
1999 January 31,
(Unaudited) 1999
-------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 28,718 $ 172,043
Customer receivables 3,134,354 2,932,807
Notes receivable 926,209 86,703
Merchandise inventories 4,042,574 2,026,628
Other - 52,870
-------------------- -------------------
Total current assets 8,131,855 5,271,051
Videocassette rental inventory, net of
accumulated amortization 15,271,316 21,119,897
Property and equipment, net 5,368,445 4,525,986
Goodwill 6,622,235 5,176,850
Deferred tax asset 1,235,139 883,249
Other assets 2,571,131 1,275,847
-------------------- -------------------
TOTAL ASSETS $39,200,121 $38,252,880
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31,
1999 January 31,
(Unaudited) 1999
--------------------- -------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Accounts payable $ 20,859,006 $ 9,328,556
Short term portion of senior secured revolving credit facility 9,959,112 -
Accrued expenses 2,666,966 3,422,724
Current portion of long-term debt 4,117,352 2,125,187
--------------------- -------------------
Total current liabilities 37,602,436 14,876,467
Long term senior secured revolving credit facility - 16,044,502
Long term debt, less current portion 1,303,861 1,636,646
Other liabilities 163,859 427,791
--------------------- -------------------
TOTAL LIABILITIES 39,070,156 32,985,406
STOCKHOLDER'S EQUITY
Preferred stock 6,985,297 3,763,963
Common Stock, $.01 par value per share, 30,000,000 shares
Authorized; 14,994,593 shares issued and outstanding at
October 31, 1999 and 13,498,715 shares issued and outstanding
at January 31, 1999 149,946 134,987
Additional paid-in capital 11,542,965 9,229,687
Accumulated deficit (18,548,243) (7,861,163)
--------------------- -------------------
TOTAL STOCKHOLDER'S EQUITY 129,965 5,267,474
--------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 39,200,121 $38,252,880
===================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues
Rental revenues and product sales $ 8,723,038 $ 4,773,102 $ 36,241,069 $14,174,164
Management fee income - 59,800 - 116,133
----------- ----------- ------------ -----------
Total Revenues 8,723,038 4,832,902 36,241,069 14,290,297
----------- ----------- ------------ -----------
Operating costs and expenses
Store operating expenses 5,849,472 3,086,513 22,905,007 7,517,466
Amortization of videocassette rental inventory 928,953 642,278 4,434,986 1,805,657
Cost of product sales 2,140,979 890,955 6,496,760 2,174,651
Cost of leased product 1,562,097 585,968 3,713,689 1,292,854
General and administrative expenses 2,722,220 1,113,314 8,174,237 2,563,873
Store closure expenses 1,345,400 - 1,345,400 -
----------- ----------- ------------ -----------
Total operating costs and expenses 14,549,121 6,319,028 47,070,079 15,354,501
----------- ----------- ------------ -----------
Loss from operations (5,826,083) (1,486,126) (10,829,010) (1,064,204)
Other (income) expense:
(Gain) loss on sale of assets 383,384 - (1,529,794) -
Interest expense, net 462,100 324,953 1,744,862 647,053
Other (21,696) - (76,432) (15,097)
----------- ----------- ------------ -----------
Loss before taxes (6,649,871) (1,811,079) (10,967,646) (1,696,160)
Income tax benefit - (647,263) (546,603) (2,477,132)
----------- ----------- ------------ -----------
Net income (loss) before dividends (6,649,871) (1,163,816) (10,421,043) 780,972
=========== =========== ============ ===========
Dividends (152,000) (266,037)
----------- ----------- ------------ -----------
Net income (loss) after dividends $(6,801,871) $(1,163,816) $(10,687,080) $ 780,972
=========== =========== ============ ===========
Basic earnings (loss) per share ($0.46) ($0.10) ($0.76) $0.07
Diluted earnings (loss) per share ($0.46) ($0.10) ($0.76) $0.07
Weighted average number of common
shares outstanding
Basic 14,823,823 12,140,497 14,152,717 11,419,984
Diluted 14,823,823 12,140,497 14,152,717 11,913,471
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
October 31, October 31,
1999 1998
------------ -----------
<S> <C> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $(10,421,043) $ 780,972
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,974,897 2,262,204
Issuance of stock for services and inventory 2,908,582 141,067
Gain on sale of assets (1,529,802) -
Decrease (increase) in deferred tax asset (546,603) (2,477,132)
Changes in assets and liabilities, net of effects from
acquisitions:
Increase in customer receivable (969,814) (296,819)
Decrease (increase) in notes receivable (9,506) 268,727
Increase in merchandise inventories (2,480,269) (623,902)
Increase in other assets (1,060,015) (884,265)
Increase in accounts payable 8,629,521 1,253,004
Decrease in accrued expenses (2,724,563) (159,060)
Decrease in other liabilities (263,934) (283,126)
------------ -----------
Net cash used in operating activities (2,492,549) (18,330)
------------ -----------
Cash flows from investing activities:
Purchases of videocassette rental inventory (6,217,385) (2,922,438)
Purchases of fixed assets (2,413,732) (606,489)
Proceeds from sale of fixed assets 13,863,000 -
Proceeds from sale of film library 818,171
Repayment on note receivable 1,228,000
Store acquisitions (167,036) (713,743)
------------ -----------
Net cash provided by (used in) investing activities 6,292,847 (3,424,499)
------------ -----------
Cash flows from financing activities:
Principal payments on obligations under capital leases - (18,136)
Repayment of long-term debt (356,599) (3,641,078)
Proceeds from issuance of long term debt 2,015,979 6,416,264
Proceeds from borrowings (repayments) under revolving -
credit facility (6,085,390)
Proceeds from the issuance of preferred stock 625,000 700,000
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 (3,943,623) 3,457,050
------------ -----------
Net increase (decrease) in cash (143,325) 14,221
Cash at beginning of the period 172,043 28,127
------------ -----------
Cash at end of the period $ 28,718 $ 42,348
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Nine Months Ended
October 31, October 31,
1999 1998
---------- ----------
<S> <C> <C>
Supplementary disclosures of cash flow information
Cash paid during the year:
Interest $ 1,174,777 $ 420,590
Income taxes 17,924 800
Noncash investing and financing activities:
Professional services and the purchase of inventory
financed through issuance of stock 2,908,582 141,067
Liabilities converted to preferred stock 1,187,334 -
Notes receivable from sale of assets 830,000 -
Preferred stock dividends 266,037 -
</TABLE>
For acquisitions and divestiture consummated during the nine months ended
October 31, 1999 and October 31, 1998, (including post closing adjustments) the
Company paid $167,036 and $713,743, respectively, net of cash acquired. In
conjunction with the acquisitions, liabilities were assumed as follows:
<TABLE>
<S> <C> <C>
Fair value of assets acquired $ 1,614,929 $ 5,587,502
Cash paid (167,036) (713,743)
Note payable issued - (2,765,159)
Common stock issued (641,394) (1,895,755)
Preferred stock issued (1,251,174) -
Goodwill 4,172,469 1,985,951
----------- -----------
Liabilities assumed $ 3,727,794 $ 2,198,796
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
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, 1999, the consolidated
statement of operations for the three and nine months ended October 31, 1999 and
1998, and the consolidated statement of cash flows for the nine months ended
October 31, 1999 are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. 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.
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, 1999, the results of operations for the
three and nine months ended October 31, 1999 and 1998, and cash flows for the
nine months ended October 31, 1999 and 1998. 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.
2. Acquisitions
On March 26, 1999, the Company issued 112 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to Box
Office, LLC as part of the consideration for the purchase of the assets of a
video store acquired from Box Office, LLC. The Series C Convertible Redeemable
Preferred Stock is convertible into shares of the Company's Common Stock at a
conversion price of $2.00 per share.
On March 31, 1999, the Company acquired Video Galaxy, Inc. ("Video Galaxy") from
the shareholders of Video Galaxy, in a transaction structured as a reverse
triangular merger, with a newly formed subsidiary of Video City merging into
Video Galaxy. Video Galaxy owned and operated 15 retail video stores in
Connecticut and Massachusetts. The purchase price consisted of (i) 344,000
shares of Video City Common Stock (subject to post-closing adjustments, if any)
and (ii) assumption and payment of indebtedness of Video Galaxy by the Company
in the amount of $4,833,000 (of which approximately $1,757,000 was paid off by
the Company at closing and $2,000,000 was converted into 2,000 shares of the
Company's Series D Convertible Redeemable Preferred Stock and 500,000 warrants
with an exercise price of $3.00 per share). The payoff of indebtedness at
closing was provided by proceeds obtained from a note payable to an existing
creditor of the Company.
<PAGE>
3. Divestiture of Stores
On July 26, 1999, the Company sold the assets of 49 of its Videoland retail
video stores located in the states of Washington and Oregon to Blockbuster, Inc
("Blockbuster"). The aggregate purchase price for the sale of the 49 stores was
approximately $14 million in cash, and approximately $2 million in notes
receivable which are subject to the transfer of assets of the four additional
Videoland stores and to certain post closing adjustments. The Company recognized
the gain on the sale of approximately $1.9 million on July 26, 1999, which
includes the four additional Videoland stores, which were transferred on August
30, 1999.
4. Preferred Stock
On March 26, 1999, the Company issued 112 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to Box
Office, LLC, as part of the consideration for the purchase of the assets of a
video store acquired from Box Office, LLC. Each share of Series C Convertible
Redeemable Preferred Stock is convertible into 500 shares of the Company's
Common Stock at a conversion price of $2.00 per share. The Series C Preferred
Stock was converted based on the market value of the Company's Common Stock on
the date of issuance. On June 30, 1999, Box Office LLC converted 112 shares of
the Company's Series C Convertible Redeemable Preferred Stock to 56,000 of the
Company's Common Stock.
On March 31, 1999, the Company issued 2,000 shares of the Company's Series D
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to
Mortco, Inc. (a subsidiary of Rentrak Corporation) in consideration for the
cancellation of indebtedness from Video Galaxy, Inc., to such parties in the
amount of $2,000,000. Each share of Series D Convertible Redeemable Preferred
Stock is convertible into 333.3 shares of the Company's Common Stock at a
conversion price of $3.00 per share.
On May 12, 1999, the Company sold 750 shares of the Company's series AA
Convertible Redeemable Preferred Stock, $100 stated value per share, to Mortco,
Inc. in consideration for cancellation of trade payables owed by the Company to
Rentrak Corporation in the amount of $75,000. The shares of Series AA Preferred
Stock are convertible into the Company's Common Stock at a conversion price of
$2.00 per share.
On June 2, 1999, the Company issued 303 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to The
Value Group, LLC in consideration for cancellation of trade payables owed by the
Company to The Value Group, LLC in the amount of $303,000. On July 13, 1999, the
Company issued 100 shares of the Company's Series C Convertible Redeemable
Preferred Stock, $1,000 stated value per share, to DAZ Systems, Inc. in
consideration for the cancellation of trade payables owed by the Company to DAZ
Systems, Inc. in the amount of $100,000. The shares of Series C Preferred Stock
are convertible into the Company's Common Stock at a conversion price of $2.00
per share.
On June 11, 1999, the Company issued 2,000 shares of the Company's Series E
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to
International Video Distributors, LLC ("IVD") and Common Stock Purchase Warrants
to purchase 50,000 shares of the Company's Common Stock at an exercise price of
$2.00 per share. IVD cancelled outstanding trade payables in the amount of
$2,000,000 owed by the Company to IVD. Each share of Series E Preferred Stock is
convertible into a number of shares of Common Stock determined by dividing
$1,000 by the conversion price in effect on the conversion date. During certain
periods, the conversion price is equal to the market price of the Company's
Common Stock and ranges between $1.60 and $3.00; after such period, the
conversion price is equal to $3.00.
On July 19, 1999, the Company issued an aggregate of 625 shares of the Company's
Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share,
to eight accredited investors including an executive officer of the Company, for
cash in the amount of $625,000 in a private placement transaction. The shares of
Series C Preferred Stock are convertible into the Company's Common Stock at a
conversion price of $2.00 per share.
<PAGE>
On August 3, 1999, three of the Company's investors converted 2,500 shares of
the Company's Series AA Convertible Redeemable Preferred Stock, $100 stated
value per share, to Common Stock at a conversion rate of 50 shares of Common
Stock for one share of Series AA Preferred Stock.
On August 8, 1999, International Video Distributors, LLC, converted 400 shares
of the Company's Series E Convertible Redeemable Preferred Stock, $1,000 stated
value per share, to Common Stock at a conversion rate of 625 shares of Common
Stock for one share of Series E Preferred Stock.
On September 9, 1999, the Company issued 56 shares of the Company's Series E
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to
Interstate Personnel, Inc., in consideration for cancellation of trade payables
owed by the Company to Interstate Personnel, Inc., in the amount of $56,000.
Each share of Series E Preferred Stock is convertible into a number of shares of
Common Stock determined by dividing $1,000 by the conversion price in effect on
the conversion date. During certain periods, the conversion price is equal to
the market price of the Company's Common Stock and ranges between $1.60 and
$3.00; after such period, the conversion price is equal to $3.00.
On September 17, 1999, International Video Distributors, LLC, converted 200
shares of the Company's Series E Convertible Redeemable Preferred Stock, $1,000
stated value per share, to Common Stock at a conversion rate of 625 shares of
Common Stock for 1 share of Series E Preferred Stock.
5. Preferred Stock Dividends
On July 6, 1999, the Company issued 20,294 shares of the Company's Common Stock
to two holders of the Company's Series B Convertible Redeemable Preferred Stock
as stock dividends with respect to the Series B Preferred Stock. In addition,
the Company issued 27,950 shares of the Company's Common Stock to various
shareholders as stock dividends with respect to the Company's Series AA
Convertible Redeemable Preferred Stock.
On August 3, 1999, September 1, 1999 and October 4, 1999 the Company issued
25,215, 46,216 and 48,944 shares of the Company's Common Stock, respectively, to
two holders of the Company's Series B Convertible Redeemable Preferred Stock as
stock dividends with respect to the Series B Preferred Stock.
6. 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. The following table summarizes the calculation of the Company's basic
and diluted earnings per share for the periods presented:
<TABLE>
<CAPTION>
For the three months ended October 31,
------------------------------------------------------------------------------------
1999 1998
-------------------------------------- ---------------------------------------
Per-share Per-share
Income Shares amount Income Shares amount
----------- ---------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) available to common
stockholders $(6,801,871) 14,823,823 $(0.46) $(1,163,816) 12,140,487 $(0.10)
Effect of Dilutive Securities:
Incremental shares from outstanding
Common stock options, warrants, and
Preferred stock - - - - -
----------- ---------- ------ ----------- ---------- ------
Diluted EPS
Income (loss) available to common
stockholders $(6,801,871) 14,823,823 $ (.46) $(1,163,816) 12,140,487 $(0.10)
=========== ========== ====== =========== ========== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the three months ended October 31,
-----------------------------------------------------------------------------------
1999 1998
-------------------------------------- ------------------------------------
Per-share Per-share
Income Shares amount Income Shares amount
------------ ---------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) available to common
stockholders $(10,687,080) 14,152,717 $(0.76) $780,972 11,419,984 $0.07
Effect of Dilutive Securities:
Incremental shares from outstanding
Common stock options, warrants, and
Preferred stock - - - - 493,487 -
------------ ---------- ------ -------- ---------- -----
Diluted EPS
Income (loss) available to common
stockholders (10,687,080) 14,152,717 $(0.76) $780,972 11,913,471 $0.07
============ ========== ====== ======== ========== =====
</TABLE>
All outstanding 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.
7. Deferred Tax Assets
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. At January 31, 1999, no
valuation allowance was recorded against the deferred tax asset because the
Company determined from its projections that it is more likely than not that
future taxable income will be sufficient to realize the deferred tax asset. Due
to the pending acquisitions, management cannot determine if it is more likely
than not that future taxable income will be sufficient to realize all of the
deferred tax asset generated in the last two current quarters. Accordingly, a
valuation allowance has been established against losses generated in the last
two quarters.
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, particularly under
this Item 2, 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, 1999.
Results of Operations
Three months and nine months ended October 31, 1999 compared to the three months
and nine months ended October 31, 1998.
Revenues
Rental revenue and product sales for the three months and the nine months ended
October 31, 1999 totaled $8,723,038 and $36,241,069, compared to $4,832,902
and $14,290,297 for the three months and nine months ended October 31, 1998.
The increase in revenue for the three months and nine months ended October 31,
1999 was $3,890,136 or 80% and $21,950,772 or 154% compared to the corresponding
periods ending October 31, 1998.
<PAGE>
Of the 92 stores, 76 stores were acquired on December 28, 1998, one store was
acquired on March 26, 1999, and 15 stores were acquired on March 31, 1999. As of
October 31, 1999, the Company was operating 77 stores after selling 49 stores to
Blockbuster on July 26, 1999, and closing 13 under-performing stores during
September and October of 1999. Same store revenues for the three months and nine
months ended October 31, 1999 increased by approximately 4.84% and 5.08%,
compared to the same periods ending October 31, 1998. At October 31, 1999 the
Company operated 77 stores in 10 states compared to 52 stores in 4 states at
October 31, 1998. The Company had no management fee income for the three months
and nine months ended October 31, 1999, compared to $59,800 and $116,133 for the
three months and nine months ended October 31, 1998. The decrease resulted from
the reduction in the number of managed stores from two to none.
Store Operating Expenses
Store operating expenses for the three months and the nine months ended October
31, 1999 totaled $5,849,472 and $22,905,007, as compared to $3,086,513 and
$7,517,466 for the three months and nine months ended October 31, 1998. Store
operating expenses increased by $2,762,959 or 90% and $15,387,541 or 205% for
the three months and nine months ended October 31, 1999 as compared to the
corresponding periods ending October 31, 1998. The increase in store operating
expenses was primarily due to the acquisition of 92 stores since October 31,
1998, partially offset by the disposition of 49 stores since July 26, 1999.
Store operating expenses as a percentage of total revenue for the three months
and nine months ended October 31, 1999 were 67% and 63% compared to 64% and 53%
for the corresponding periods ending October 31, 1998. The increase in store
operating expenses as a percentage of revenue for the nine months ended October
31, 1999 compared to the nine months ended October 31, 1998 was primarily due to
assimilation, payroll, training, and occupancy costs associated with the 76
stores acquired on December 28, 1998 and the 15 stores acquired on March 31,
1999.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory for the three months and nine
months ended October 31, 1999 totaled $928,953 and $4,434,986, compared to
$642,278 and $1,805,657 for the three months and nine months ended October 31,
1998. Amortization of videocassette rental inventory increased by $286,657 or
45% and $2,629,329 or 146% for the three months and nine months ended October
31, 1999 as compared to the corresponding periods ended October 31, 1998. The
primary reason for the increase in the amortization of videocassette rental
inventory was the increase in inventory due to the acquisition of 92 stores
since October, 1998, partially offset by the decrease in inventory after the
sale of 49 stores to Blockbuster, Inc. on July 26, 1999. Amortization of
videocassette rental inventory as a percentage of revenue for the three months
and nine months ended October 31, 1999 were 10.6% and 12.2%, compared to 13.3%
and 12.6% for the corresponding periods ended October 31, 1998.
Cost of Product Sales
Cost of product sales for the three months and nine months ended October 31,
1999 totaled $2,140,979 and $6,496,760 compared to $890,955 and $2,174,651 for
the three months and nine months ended October 31, 1998. Cost of product sales
increased by $1,250,024 or 140% and $4,322,109 or 199% for the three months and
nine months ended October 31, 1999 as compared to the corresponding periods
ended October 31, 1998. The increase in the cost of product sales for the three
months and nine months ended October 31, 1999 was primarily due to aggregate
growth in videocassette, concession, and accessory sales of 43% and 72% as
compared to the corresponding periods ended October 31, 1998.
Cost of Leased Product
Cost of leased product for the three months and nine months ended October 31,
1999 totaled $1,562,097 and $3,713,689, compared to $585,968 and $1,292,854 for
the three months and nine months ended October 31, 1998. Cost of leased product
increased by $976,129 or 167% and $2,420,835 or 187% for the three months and
nine months ended October 31, 1999 as compared to the corresponding periods
ended October 31, 1998. The increase to cost of leased product was primarily
attributable to the acquisition of 92 stores since October 31, 1998, partially
offset by the sale of 49 stores to Blockbuster, Inc. on July 26, 1999. Cost of
leased product as a percentage of total revenue was 17.9% and 10.2% for the
three months and nine months ended October 31, 1999
<PAGE>
compared to 12.1% and 9% for the corresponding periods ended October 31, 1998.
Cost of leased products as a percentage of total revenue for the three months
ended October 31, 1999 increased due to a greater number of stores participating
in the revenue sharing (the Company and its suppliers share in the revenue
generated from the leased products) arrangement. Cost of leased product as a
percentage of revenue remained fairly constant for the nine months ending
October 31, 1999 as compared to the corresponding period ended October 31, 1998.
General and Administrative Expenses
General and administrative expenses for the three months and nine months ended
October 31, 1999 totaled $2,722,220 and $8,174,237, compared to $1,113,314 and
$2,563,873 for the three months and nine months ended October 31, 1998. General
and administrative expenses increased by $1,608,906 or 145% and $5,610,364 or
219% for the three months and nine months ended October 31, 1999 as compared to
the corresponding periods ended October 31, 1999. The increase for the three
months and nine months ended October 31, 1999 was primarily due to additional
costs incurred to support the 92 stores acquired since October 31, 1999,
partially offset by the sale of 49 stores to Blockbuster, Inc. on July 26, 1999.
General and administrative expenses as a percentage of revenues were 31.2% and
22.6% for the three months and nine months ended October 31, 1999 compared to
23% and 17.9% for the corresponding period ended October 31, 1998. The increase
in general and administrative expenses as a percentage of revenue was
attributable to the Company's anticipation of a potential merger with West Coast
Entertainment Corporation, and the additional resources that will be required to
complete the acquisition.
Store Closure Expenses
During September and October of 1999, the Company closed 13 under-performing
stores and incurred $1,345,400 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.
Gain on Sale of Assets
Gain on sale of assets for the three months and nine months ended October 31,
1999, resulted from the sale of 49 stores sold to Blockbuster, Inc. on July 26,
1999. The Company reported a $1.5 million gain for the nine months ended October
31, 1999, which included a $1.9 million gain recognized during the quarter ended
July 31, 1999, and a $.383 million loss which resulted from the disposal of
leased inventory associated with the sold stores.
Interest Expense
Interest expense for the three months and nine months ended October 31, 1999
totaled $462,100 and $1,744,862, compared to $324,953 and $647,053 for the three
months and nine months ended October 31, 1998. Interest expense increased by
$137,147 or 42% and $1,097,809 or 170%, for the three months and nine months
ended October 31, 1999 as compared to the corresponding periods ended October
31, 1998. The increase in interest expense was primarily due to the increased
level of borrowings under the Company's credit facility.
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. At January 31, 1999, no
valuation allowance was recorded against the deferred tax asset because the
Company determined from its projections that it is more likely than not that
future taxable income will be sufficient to realize the deferred tax asset. Due
to the pending acquisitions, management cannot determine if it is more likely
than not that future taxable income will be sufficient to realize all of the
deferred tax asset generated in the last two current quarters. Accordingly, a
valuation allowance has been established against losses generated in the last
two quarters.
Liquidity and Capital Resources
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 and extended
<PAGE>
vendor terms will be sufficient to fund future videocassette and other inventory
purchases and other working capital needs for its existing stores. As part of
its aggressive growth strategy, the Company requires greater working capital to
sustain its current level of growth. There can be no assurance, however, that
cash from operations and extended vendor terms will be sufficient to fund future
videocassette and inventory purchases and other working capital to sustain the
continued aggressive growth of the Company. In the event the Company is unable
to obtain equity financing and/or debt financing, the Company may not have the
liquidity to sustain its current rate of growth.
Videocassette rental inventory is accounted for as a non-current asset under
generally accepted accounting principles because it is not an asset that is
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 this asset as non-
current excludes it from the computation of working capital. The acquisition
cost of videocassette rental inventory, 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 non-current asset, the Company
anticipates that it will operate with a working capital deficit during the
fiscal year ending January 31, 2000.
The Company's primary long-term capital needs are for opening and acquiring new
stores. The Company expects to fund such needs through cash flows from
operations, the net proceeds from the possible sale of debt or equity
securities, bank credit facilities, trade credit, and equipment leases. On
December 28, 1998, the Company and its subsidiaries entered into a Loan and
Security agreement with BankBoston providing for a $30 million revolving credit
facility secured by all of the assets of Video City and its subsidiaries. The
BankBoston credit facility replaced the Company's previous loan facility. The
loan agreement provides for a maturity date of December 29, 2001 and a per annum
interest rate equal to either (a) the base rate announced from time to time by
BankBoston, N.A. plus 0.5 percent or (b) LIBOR plus 3.0 percent, at Video City's
election. In addition, the Company is obligated to pay various fees in
connection with the credit facility. The amount available for borrowing under
the line of credit is determined by deducting the Company's principal balance of
the line of credit from its borrowing base. The borrowing base is determined by
multiplying the applicable inventory advance rate by the number of units of the
acceptable inventory, net of reserves. The agreement provides for various
financial reporting and financial performance covenants that require the Company
to meet or exceed certain financial ratios on a monthly basis. Due to the
Company not meeting some of the financial covenants as required, the Company
requested and has been granted waivers by BankBoston for the quarters ended
April 30, 1999 and July 31, 1999. On September 23, 1999, the Company entered
into a forebearance agreement with BankBoston that amended the terms of the Loan
Agreement and revised the financial performance covenants of the Loan Agreement
and contained weekly covenant requirements. From November 17, 1999 through
November 30, 1999, the Company did not meet the financial performance covenants
as set forth in the forebearance agreement. As a result of not meeting the
financial covenants, the interest rate on the loan was increased from .5% plus
prime to the default rate of interest of 3% plus prime. The forbearance
agreement also provides that the aggregate balance of the loan shall be
temporarily limited to $10,500,000. The Company has reclassified the senior
secured revolving credit facility to current liability. BankBoston, at its
discretion, is continuing to make advances in accordance with the Loan Agreement
despite the default of the aforementioned forebearance agreement. There can be
no assurance, however, that BankBoston will continue to make advances in the
future under the terms of the Loan Agreement.
As of October 31, 1999 the total outstanding balance under the BankBoston credit
facility was $9,959,112 and the availability on the credit facility was
approximately $12,106. As of December 15, 1999, the total outstanding balance
under the BankBoston credit facility was $10,242,404 and the availability on the
credit facility was approximately $144,904. The Company currently intends to
finance future acquisitions with funds from borrowings, through assumption of
liabilities by the Company and net proceeds from possible debt or equity
financing. There can be no assurance that such financing will be available to
the Company.
The Company has outstanding indebtedness in the aggregate amount of $3,105,141
with certain of the Company's key suppliers that reached maturity in July 1999
and are now overdue. The debt agreements with the key suppliers provide for
increased interest rates and penalty payment of 8% during the periods of
default. Although there can be no assurances, the Company anticipates that it
will be able to extend the maturity dates of such indebtedness. The Company has
outstanding indebtedness in the aggregate amount of $1,681,468 with one of the
Company's key suppliers and several other affiliates that reach maturity in
January and February 2000. The Company has defaulted on the monthly payments and
will be subject to increased interest rates. Although
<PAGE>
there can be no assurances, the Company anticipates that it will be able renew
the agreement with the key supplier on favorable terms before the maturity and
repay the outstanding balance to the affiliates before the maturity date.
On June 14, 1999, the Company issued an aggregate of 2,000 shares of the
Company's Series E Convertible Preferred Stock, $1,000 stated value per share,
to International Video Distributors, and Common Stock purchase warrants to
purchase 50,000 shares of the Company's Common Stock at an exercise price of
$2.00 per share. International Video Distributors agreed to cancel outstanding
trade payables in the amount of $2,000,000 owed by the Company to International
Video Distributors.
On July 19, 1999, the Company issued an aggregate of 625 shares of the Company's
Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share
to various shareholders for $625,000 cash in the form of a private placement.
Each share of Series C Convertible Redeemable Preferred Stock is convertible
into 500 shares of the Company's Common Stock at a conversion price of $2.00 per
share.
On July 26, 1999, the Company sold the assets of 49 of its Videoland retail
video stores located in the states of Washington and Oregon to Blockbuster, Inc.
The aggregate purchase price for the sale of the 49 stores is approximately $16
million in cash, of which $15.3 million was received as of August 30, 1999. The
net proceeds from the sale of assets were utilized to pay down the Company's
Senior Credit Facility.
On August 1, 1999, the Company and West Coast Entertainment Corporation ("West
Coast") entered into an Agreement and Plan of Merger (the "Merger Agreement"),
pursuant to which a wholly-owned subsidiary of the Company will merge with and
into West Coast such that West Coast will become a wholly-owned subsidiary of
the Company (the "Merger"). Pursuant to the Merger Agreement, upon the
effectiveness of the Merger, each outstanding share of Common Stock of West
Coast will be converted into the right to receive (i) a number of shares of
Common Stock of the Company, as is calculated pursuant to the Common Stock
Exchange Ratio (as defined in the Merger Agreement), subject to a maximum of
.333 shares and a minimum of .250 shares, and (ii) 0.05 shares of the Company's
Series F Convertible Redeemable Preferred Stock, having a liquidation preference
of $25.00 per share.
The consummation of the Merger is subject to certain terms and conditions set
forth in the Merger Agreement, including the obtaining or arranging of
financing, the approval by the stockholders of the Company and West Coast,
certain regulatory approvals and the approval by creditors and other third
parties. There can be no assurance that the Merger with West Coast will be
consummated. In the event that the financing is not obtained and the merger is
not consummated the Company may restructure its operations and consider future
divestitures.
The Company has retained the services of R.W. Pressprich & Co. to act as the
Company's private placement agent in connection with the financing of the West
Coast Merger. The Company intends to use the net proceeds of the debt financing
to refinance certain of the creditors and vendors of the Company and West Coast,
and to pay the costs and expenses of the Merger. There can be no assurances that
the Company will be successful in obtaining such financing.
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 carrying value of the Company's bank debt approximates fair
value at October 31, 1999 and 1998 since the note related thereto substantially
bears interest at a floating rate based upon the lenders' "prime" rate. The
carrying value of the notes receivable approximate fair market value.
Cash Flows
Nine Months Ended October 31, 1999 Compared to the Nine Months Ended October 31,
1998
The increase in net cash used in operating activities of $2,510,879 for the nine
months ended October 31, 1999 compared to the nine months ended October 31, 1998
was primarily due to the decrease accrued expenses partially offset the increase
in merchandise inventories, accounts receivable and accounts payable. Net cash
provided by investing activities increased by $9,717,346 for the nine months
ended October 31, 1999 compared
<PAGE>
to the nine months ended October 31, 1998, primarily due to the increase in the
proceeds from the sale of fixed assets, partially offset by the increase in the
purchases of videocassette rental inventory and fixed assets. Net cash used in
financing activities increased $7,400,673 for the nine months ended October 31,
1999 compared to the nine months ended October 31, 1998 primarily due to the
increase in the repayment of the revolving credit facility, partially offset by
the proceeds from the issuance of debt.
Year 2000
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
computer systems that uses time-sensitive software programming may recognize a
date using "00" as the year 1900 rather than the year 2000, which could result
in miscalculation or system failures.
The Company has completed its assessment of all its information technology
systems, related computer applications, and any embedded systems contained in
the Company's buildings, equipment, and other infrastructure and has determined
that it is ready for the Year 2000. Substantially all of the Company's hardware
and software systems have been verified as being Year 2000 compliant.
The Company has important and material relationships with a number of its
vendors and suppliers and has obtained written verification from these third
parties that they expect to be Year 2000 compliant in time. However, if the
Company's vendors and suppliers are unable to resolve such processing issues in
a timely manner, it could result in material financial risk to the Company.
Management has determined that the costs of addressing potential problems are
not expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. The estimated
total costs to address the Company's Year 2000 issues is approximately $25,000
which includes the cost of upgrading software and hardware systems.
The worst case scenario for the Company would be the failure of its video
stores' point of sale system. The Company is in the process of developing back-
up systems that do not rely on computers in response to this unlikely event.
<PAGE>
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
On October 4, 1999, TLA Entertainment Group, Inc. and the six stockholders of
TLA filed a complaint against the Company in the United States District Court in
the Eastern District of Pennsylvania. The complaint asserts a cause of action
for breach of a merger agreement entered into by TLA and the Company in June
1999 and seeks unspecified compensatory damages including lost profits and costs
and expenses. By written notice provided to the Company, TLA terminated the
merger agreement on October 1, 1999. TLA owns and operates six retail video
stores in Pennsylvania and New York. The Company is vigorously contesting this
matter and is unable to predict the likelihood of an unfavorable outcome or a
range of potential loss, if any, at this time.
Item 2. Changes in Securities and Use of Proceeds
On August 3, 1999, the Company issued 70,000 shares of the Company's Common
Stock to a former employee of Videoland, Inc. in consideration for certain
services provided by the former employee of Videoland, Inc.
On August 8, 1999, the Company issued 30,800 shares of the Company's Common
Stock to a vendor, in consideration for fixed assets acquired by the Company.
On September 9, 1999, the Company issued 56 shares of the Company's Series E
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to
Interstate Personnel, Inc., in consideration for cancellation of trade payables
owed by the Company to Interstate Personnel, Inc., in the amount of $56,000.
Each share of Series E Preferred Stock is convertible into a number of shares of
Common Stock determined by dividing $1,000 by the conversion price in effect on
the conversion date. During certain periods, the conversion price is equal to
the market price of the Company's Common Stock and ranges between $1.60 and
$3.00; after such period, the conversion price is equal to $3.00. The Company
also issued warrants to purchase 5,000 shares of Common Stock at an exercise
price of $2.00 per share to Interstate Personnel, Inc.
On September 24, 1999, the Company issued 5,000 shares of the Company's Common
Stock to the property owner of one of the Company's rental properties in
consideration of accrued occupancy costs. The Company also issued warrants to
purchase 50,000 shares of Common Stock at an exercise price of $2.00 per share
to another property owner in consideration of accrued occupancy costs.
On October 27, 1999, the Company issued 1,750 shares of the Company's Common
Stock to a vendor in consideration for product purchased.
Item 3. Default Upon Senior Securities
In December 1998, the Company and its Subsidiaries established a $30 million
revolving credit facility with BankBoston Retail Finance Inc., pursuant to a
loan and security agreement. On September 10, 1999, the Company entered into a
forebearance agreement with BankBoston that amended the terms of the loan
agreement and revised the financial performance covenants of the Loan Agreement
and contained weekly covenant requirements. From November 17, 1999 through
November 30, 1999, the Company did not meet the financial performance covenants
as set forth in the forebearance agreement. BankBoston, at its discretion, is
continuing to make advances in accordance with the Loan Agreement despite the
default of the aforementioned forebearance agreement. There can be no assurance,
however, that BankBoston will continue to make advances in the future under the
terms of the Loan Agreement.
As of October 31, 1999 the total outstanding balance under the BankBoston credit
facility was $9,959,112 and the availability on the credit facility was
approximately $12,106. As of December 15, 1999, the total outstanding balance
under the BankBoston credit facility was $10,242,404 and the availability on the
credit facility was approximately $144,904.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Numbers Description
- ------- -----------
10.1 Forbearance Agreement, dated September 10, 1999, by and between the
Company and BankBoston Retail Finance, Inc.
27 Financial Data Schedule
<PAGE>
(b) Reports on Form 8-K:
-------------------
On August 10, 1999, the Company filed a Current Report on Form 8-K, dated July
26, 1999, to report under Item 2 the disposition of 49 of the Company's stores
to Blockbuster, Inc., to report under Item 5 the merger agreement entered into
with West Coast Entertainment Corporation, and to report under Item 7 the pro
forma financial information of the disposition of the 49 stores sold to
Blockbuster, Inc.
On August 11, 1999, the Company filed a Current Report on Form 8-K, dated August
6, 1999,describing terms of the Common Stock of the Company, so that it may be
incorporated by reference into other filings that the Company may make,
including but not limited to, registration statements on Forms S-3 and S-8.
<PAGE>
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.
Date: December 20, 1999 /s/ Robert Y. Lee
-----------------
Robert Y. Lee
Chief Executive Officer
(Principal Executive Officer)
Date: December 20, 1999 /s/ Timothy J. Denari
---------------------
Timothy J. Denari
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT 10.1
FORBEARANCE AGREEMENT
THIS FORBEARANCE AGREEMENT ("Agreement') is dated as of September 10, 1999
between Video City, Inc., a Delaware corporation with its principal executive
offices at 370 Amapola Avenue, Suite 208, Torrance, California, 90501, (as a
"Borrower" and "Agent Borrower") and its wholly owned subsidiaries listed as "a
Borrower" below ("Subsidiaries", and together with Video City, Inc., the
"Borrowers") and BankBoston Retail Finance Inc., a Delaware corporation with an
address of 40 Broad Street, Boston 02109 (the "Lender").
RECITALS
A. Lender and Borrower are parties to the Loan and Security Agreement
(the "Loan Agreement") dated as of December 29, 1999, as amended from time to
time. Terms defined in the Loan Agreement are used herein as therein defined.
B. Due to the Borrowers' failure to comply with the financial covenants
set forth in Section 5.12 of the Loan Agreement and failure to comply with
certain other terms and conditions of the Loan Agreement, the Borrowers are in
default under the Loan Documents. The Borrowers have requested that Lender
forbear from exercising its rights and remedies under the Loan Documents
regarding such defaults. As an accommodation to the Borrowers, Lender has agreed
to the foregoing request, subject in all respects, however, to the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Accuracy of Recitals. The parties hereto acknowledge and agree that
--------------------
the foregoing Recitals are true and accurate.
2. Acknowledgment of Indebtedness. The Borrowers acknowledge and agree
------------------------------
they are indebted to Lender under the Loan Documents in the following amounts:
(a) an aggregate principal amount of $9,536,632.27 (as of September 20,
1999);
(b) interest of $43,791.95 (as of September 20, 1999);
(c) costs and expenses of Lender of $4,730.00 (as of September 20, 1999);
(d) a remaining unpaid facility fee of $94,500.00;
(e) a line (unused) fee of $5,414.27 (as of September 20, 1999);
(f) a termination fee of $300,000.00; and
(g) legal fees and expenses of $8,381.15, billed through August 31, 1999.
3. Default Rate. The Lender reserves the right to charge and collect the
------------
default rate of interest applicable to the Liabilities under the Loan Agreement
as of June 10, 1999 following a New Default (defined in Section 10 below).
Should Lender exercise its right to charge and collect the default rate of
interest applicable to the Liabilities from June 10, 1999, Availability shall
nevertheless be calculated by applying the Base Margin Rate or LIBOR Rate,
whichever may be applicable; provided, however that no New Default has occurred.
-------- -------
Lender reserves its
1
<PAGE>
right to calculate Availability by applying the default rate of interest
applicable to the Liabilities under the Loan Agreement as of and following a New
Default.
4. Limitation on Borrowings. Without in any way modifying the amount of
------------------------
the Loan Ceiling, which, subject to change by the Lender pursuant to the terms
of the Loan Agreement, remains Thirty Million Dollars ($30,000,000.00), the
aggregate of the balance of the Loan Account and the Stated Amount of all L/C's
shall be temporarily limited to Ten Million Five Hundred Thousand Dollars
($10,500,000.00), or such lesser amount as the Lender may establish following
the occurrence of a New Default, defined in Section 10, below.
5. Availability Reserve. Lender agrees that the Availability Reserve
--------------------
established to address discrepancies in inventory reporting by the Borrowers
shall be reduced from One Million Dollars ($1,000,000.00) to Five Hundred
Thousand Dollars ($500,000.00).
6. Financial Performance Covenants. The Borrowers' compliance with the
-------------------------------
financial performance covenants set forth in Exhibit 5-12(a) of the Loan
Agreement shall be suspended during the term of this Agreement. During the term
of this Agreement, the Borrowers shall observe and comply with the following
financial performance covenants. The financial performance covenants are based
upon the cash flow projections dated September 17, 1999 submitted to the Lender
by the Borrowers, a true copy of which is attached hereto as EXHIBIT "A".
Pursuant to Section 5.11(e) of the Loan Agreement, the Lender hereby signs-off
on such projections, which, shall hereinafter be considered the Business Plan
under the Loan Agreement.
a. The Borrowers shall not permit or suffer to exist their revenues to be
less than 85% of projected revenues, as calculable from the Business
Plan. This revenue covenant shall be tested commencing September 28,
1999 for the two week period ending September 24, 1999, on October 5,
1999 for the three week period ending October 2, 1999, and on each
week thereafter for the trailing four week period.
b. The Borrowers shall not permit or suffer to exist purchases
(delineated as "Costs of Goods Sold" in its Business Plan) to be less
than 85% of projected purchases, as calculable from the Business Plan.
This revenue covenant shall be tested commencing September 28, 1999
for the two week period ending September 24, 1999, on October 5, 1999
for the three week period ending October 2, 1999, and on each week
thereafter for the trailing four week period.
c. The Borrowers shall not permit or suffer to exist purchases from
Ingram Entertainment, Inc. for prerecorded video cassettes, DVDs,
video games, tapes, discs, and other products supplied by Ingram
Entertainment, Inc. to the Borrowers in the ordinary course of the
Borrowers' businesses to be less than $100,000.00 per week (tested on
a rolling four week basis), commencing as of September 21, 1999 for
the week ending September 18, 1999.
d. The Borrowers shall not permit or suffer to exist EBITDA, tested as of
Tuesday of each fiscal week (tested on a rolling four week basis)
ending the previous Saturday, commencing as of September 14, 1999, to
be less than 85% of a
2
<PAGE>
projected positive or more than 115% of a projected negative EBITDA,
as calculable from the Business Plan.
7. Additional Financial Reporting. In addition to any other weekly
-------------------------------
financial reports the Borrowers are required to provide to the Lender pursuant
to the terms of the Loan Agreement, weekly, on the Tuesday of each week (as of
the then immediately preceding Saturday) the Borrowers shall provide the Lender
with an Inventory roll forward report, with computer inventory control system
generated back-up documentation, certified by the Borrowers' President or Chief
Financial Officer as to the accuracy thereof. Such reports and supporting
documentation shall be in form and substance acceptable to Lender in its sole
discretion. Such report may be sent to the Lender by facsimile transmission,
provided that the original is forwarded to the Lender on the date of such
transmission.
8. Forbearance Fee. In consideration of the Lender's willingness to enter
----------------
into this Agreement, the Borrowers agree to pay the Lender a Forbearance Fee, so
referred to herein, in the amount of $150,000.00. The Borrowers hereby authorize
the Lender to charge the Loan Account with the Forbearance Fee upon execution of
this Agreement by the Borrowers and the Lender. The Forbearance Fee shall not be
included in the calculation of Availability. The Lender agrees that in the event
that the Borrowers pay all Liabilities in full (inclusive of any unpaid portion
of the Facility Fee and Early Termination Fee) on or before December 31, 1999,
the Lender will credit Fifty Percent (50%) of the Forbearance Fee paid by the
Borrowers (i.e., $75,000.00) to the Early Termination Fee that would be then due
and payable pursuant to Section 2.13(a) of the Loan Agreement.
9. Acknowledgment Regarding Liabilities; Acknowledgment of Default Under
---------------------------------------------------------------------
the Loan Documents. Borrowers acknowledge and agree that the amounts set forth
- ------------------
in Section 2 above are due and owing to Lender without offset, claim or defense
in connection therewith, all of which Borrowers hereby waive. The Borrowers
acknowledge and agree that (i) the existing defaults under the Loan Documents
constitute material defaults under the Loan Documents, (ii) any notices which
must be given and any grace periods or cure periods which must expire, prior to
Lender exercising any of its rights and remedies in connection with the Loan
Documents, have been given, complied with and expired and, in any event, are
hereby waived by Borrowers, and (iii) as a consequence, Lender is now entitled
to immediately exercise all of its rights and remedies under the Loan Documents,
at law or in equity, including, without limitation, its rights to declare all
"Liabilities" (as defined in the Loan Agreement) to be immediately due, payable
and performable, except to the extent that Lender agrees to forbear from
exercising those rights and remedies in this Agreement.
10. Forbearance; New Default. All rights and remedies of Lender in
------------------------
connection with the existing defaults under the Loan Documents are hereby
reserved, but, except as otherwise specifically provided herein, Lender agrees
to forbear from exercising its rights and remedies in connection with the
existing defaults under the Loan Documents until the earlier to occur of the
following (a "Termination Event"): (i) December 31, 1999 or (ii) the occurrence
of a "New Default" (as defined below). For purposes of this Agreement, the term
"New Default" shall mean any failure of the Borrowers in the performance of any
of the terms or conditions of, or any
3
<PAGE>
breach of any representation or warranty under, or any other default, Event of
Default, under this Agreement, the Loan Documents, any other agreements,
instruments or documents entered into in connection therewith, except that "New
Default" shall not include any of the foregoing which have occurred prior to the
date hereof, and of which Lender has actual knowledge, prior to the date hereof.
"New Default" shall also not include the failure of Borrwers to make rental
payments when due under Leases as contemplated in the Business Plan; provided,
--------
however, that none of Borrowers' lessors has made a written demand (whether by
- -------
letter, the commencement of legal proceedings or otherwise) for payment of the
overdue rent. Upon a Termination Event, Lender's agreement thereunder to forbear
from exercising its rights or remedies shall immediately terminate, without the
requirement of any demand, presentment, protest or notice of any kind, all of
which Borrowers hereby waive, and Lender may at any time thereafter proceed to
exercise any and all of its rights and remedies, including without limitation,
its rights and remedies in connection with the existing defaults under the Loan
Documents, all of which are hereby reserved.
11. Enforceability of Liabilities; Waiver and Consents. Borrowers agree
--------------------------------------------------
that (i) the Liabilities are secured by the Collateral described in the Loan
Documents, (ii) the Loan Documents are in full force and effect, and enforceable
against Borrowers in accordance with their respective terms, (iii) the Borrowers
have no offsets, claims or defenses to or in connection with the Liabilities, or
the terms of the Loan Documents, all of which offsets, claims or defenses are
hereby waived. Borrowers hereby waive and affirmatively agree not to challenge
or otherwise pursue any and all defenses, affirmative defenses, counterclaims,
claims, cause of actions, setoffs or other rights that it may have as of the
date hereof relating to the Liabilities, the Loan Documents, or the Collateral
therefor, including, but not limited to, any right to contest the existing
defaults under the Loan Documents, the liens and security interests in favor of
Lender, or the conduct of Lender in administering any such indebtedness or
agreements.
12. Covenants, Representations and Warranties. The Borrowers hereby make
-----------------------------------------
the following covenants, representations and warranties:
12.1 Authority. The Borrowers are duly authorized to enter into, and
---------
perform its obligations under, this Agreement and the agreements, instruments
and documents contemplated hereby. The execution, delivery and performance by
Borrowers of this Agreement will not violate any law or any provision of, nor
are there any grounds for acceleration under, any agreement, note, or instrument
which is binding upon Borrowers.
12.2 No Misrepresentations. Without limiting any rights or remedies
---------------------
Lender may have under law or in equity, Borrowers agree that all written
statements and information provided by Borrowers to Lender pursuant to, or in
connection wit, this Agreement or the negotiations leading to this Agreement,
have been true, complete and correct in all material respects, and none of the
same contain any material omissions of any fact or matter necessary to keep the
statements and information therein from being misleading.
12.3 Indemnity. The Borrowers agree to indemnify and hold Lender
---------
harmless from and against any and all losses, debts, damages, liabilities,
claims, demands, actions, causes
4
<PAGE>
of action, lawsuits, penalties, judgments, costs and expenses (including,
without limitation, attorneys' fees of counsel of Lender's choice), of every
nature and description, which Lender may sustain or incur, based upon, arising
out of, or in any way relating to any representations or warranties of Borrowers
being untrue or misleading, or this Agreement.
13. Entitlement to Relief from Stay. Borrowers hereby acknowledge and
-------------------------------
agree, in further consideration for the Lender entering into this Forbearance
Agreement, that, in the event that Borrowers shall make application for or seek
relief or protection under any of the sections of chapters of the Bankruptcy
Code, 11 U.S.C. (S)101 et seq. (the "Code"), or in the event that any
involuntary petition is filed against the Borrowers under the Code and an order
for relief is entered as a result thereof, then the Lender shall thereupon be
entitled to immediate relief from any automatic stay imposed by Section 362 of
the Code, or otherwise, on or against the exercise of any and all of its rights
and remedies under this Agreement, the Loan Documents or under applicable law
based upon defaults which have occurred as of the date of this Agreement. This
entitlement shall be irrespective of any of the requirements of Section 362 of
the Code and the Lender will not be obliged to satisfy those requirements in
order to obtain relief from stay. Notwithstanding the foregoing, the Borrowers
specifically acknowledge that "cause" now exists and will continue to exist for
such relief within the meaning of Section 362(d) of the Code. Borrowers now
consent and will hereafter consent to any motion for relief from stay the Lender
may file and the Borrowers irrevocably waive and release any right to object to
such relief or to impede any of the Lender's remedies, including without
limitation any rights under Sections 362 and 105 of the Code. This provision is
a material inducement to the Lender in entering into the Forbearance Agreement.
The Lender, in turn, acknowledges that this paragraph shall not be construed as
a restriction or prohibition on the Borrowers' right to make application for or
seek relief or protection under the Code.
14. Release. In consideration for Lender entering into this Agreement,
-------
Borrowers hereby release and forever discharge Lender, and its successors,
assigns, agents, shareholders, directors, officers, employees, agents,
attorneys, parent corporations, subsidiary corporations, affiliated
corporations, affiliates, and each of them, (and in the case of individuals, in
their individual capacity and as they have acted as agents of the Lender) from
any and all claims, debts, liabilities, demands, obligations, costs, expenses,
actions and causes of action, of every nature and description, known and
unknown, whether or not related to the subject matter of this Agreement, which
Borrowers now have or at any time may hold, by reason of any matter, cause or
thing occurred, done, omitted or suffered to be done prior to the date of this
Agreement. Borrowers waive the benefits of any law, which may provide in
substance: "A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor." Borrowers understand that the facts which they believe to be true at
the time of making the release provided for herein may later turn out to be
different than they now believe, and that information which is not know known or
suspected may later be discovered. Borrowers accept this possibility, and
Borrowers assume the risk of the facts turning out to be different and new
information being discovered; and Borrowers further agree that the release
provided for herein shall in all respects continue to be effective and not
subject to termination or rescission because of any difference in such facts or
any new information. This
5
<PAGE>
release is fully effective on the date hereof. Lender is not releasing Borrowers
from any claims, debts, liabilities, demands, obligations, costs, expenses,
actions or causes of action.
15. General Provisions
------------------
15.1 Integration; Amendment; Waivers. This Agreement, and the Loan
-------------------------------
Documents set forth in full and terms of agreement between the parties and are
intended as the full, complete and exclusive contract governing the relationship
between the parties, superseding all other discussions, promises,
representations, warranties, agreements and the understandings between the
parties with respect thereto. No term of the Loan Documents may be modified or
amended, nor may any rights thereunder be waived, except in a writing signed by
the party against whom enforcement of the modification, amendment or waiver is
sought. Any waiver of any condition in, or breach of, any of the foregoing in a
particular instance shall not operate as a waiver of other or subsequent
conditions or breaches of the same or a different kind. Lender's exercise or
failure to exercise any rights under any of the foregoing in a particular
instance shall not operate as a waiver of its right to exercise the same or
different rights in subsequent instances. Except as expressly provided to the
contrary in this Agreement, or in another written agreement, all the terms,
conditions, and provisions of the Loan Documents shall continue in full force
and effect. If in this Agreement's description of an agreement between the
parties, rights and remedies of Lender or obligations of the borrower are
described which also exist under the terms of the other Loan Documents, the fact
that this Agreement may omit or contain a briefer description of any rights,
remedies and obligations shall not be deemed to limit any of such rights,
remedies and obligations contained in the other Loan Documents.
15.2 Payment of Expenses. Without limiting the terms of the Loan
-------------------
Documents, Borrowers shall pay all costs and expenses incurred by or on behalf
of Lender (including attorneys' fees) arising under or in connection with the
Loan Documents, including without limitation, in connection with (i) the
negotiation, preparation, execution and delivery of this Agreement and the Loan
Documents, and any and all consents, waivers or other documents or instruments
relating thereto, (ii) the filing and recording of any Loan Documents and any
other documents or instruments or further assurances filed or recorded in
connection with any Loan Document, (iii) any other action reasonably required in
the course of administration hereof, including, but not limited to, all
reasonable out-of-pocket expenses incurred in connection with audits and
inspections, and (iv) the defense or enforcement of the Loan Documents, whether
or not there is any litigation between the parties. All costs and expenses shall
be added to the Liabilities and the Borrowers authorize the Lender to charge the
Loan Account for such expenses.
15.3 No Third Party Beneficiaries. Except as may be otherwise
----------------------------
expressly provided for herein, this Agreement does not create, and shall not be
construed as creating, any rights enforceable by any person not a party to this
Agreement.
15.4 Separability. If any provision of this Agreement is held by a
------------
court of competent jurisdiction to be invalid, illegal or unenforceable, the
remaining provisions of this Agreement shall nevertheless remain in full force
and effect.
6
<PAGE>
15.5 Counterparts. This Agreement may be executed in any number of
------------
counterparts, which together shall constitute one and the same agreement.
15.6 Time of Essence. Time is of the essence in each of the
---------------
Liabilities of the Borrowers and with respect to all conditions to be satisfied
by the Borrowers.
15.7 Statute of Limitations. The Borrowers waives the benefit of all
----------------------
statute(s) of limitations in any action or proceeding based upon or arising out
of this Agreement or the other Loan Documents.
15.8 Construction; Voluntary Agreement; Representation by Counsel.
------------------------------------------------------------
This Agreement has been prepared through the joint efforts of all the parties.
Neither its provisions nor any alleged ambiguity shall be interpreted or
resolved against any party on the ground that such party's counsel was the
draftsman of this Agreement. Each of the parties declares that such party has
carefully read this Agreement and the agreements, documents and instruments
being entered into in connection herewith and that such party knows the contents
thereof and sign the same freely and voluntarily. The parties hereto acknowledge
that they have been represented in negotiations for and preparation of this
Agreement and the agreements, documents and instrument being entered into in
connection herewith by legal counsel of their own choosing, and that each of
them has read the same and had their contents fully explained by such counsel
and is fully aware of their contents and legal effect.
15.9 Governing law; Forum Selection. This Agreement has been entered
------------------------------
into and shall be governed by the laws of, the Commonwealth of Massachusetts. As
a material part of the consideration to the parties for entering into this
Agreement, each party (i) agrees that, at the option of the Lender, all actions
and proceedings based upon, arising out of or relating in any way directly or
indirectly to, this Agreement, or the Loan Documents, shall be litigated
exclusively in courts located in Suffolk County, Massachusetts; (ii) consents to
the jurisdiction of any such court and consent to the service of process in any
such action or proceeding (whether or not litigated in courts located in Suffolk
County, Massachusetts) by personal delivery or any other method permitted by
law; and (iii) waives any and all rights to transfer or to change the venue of
any such action or proceeding to any court located outside Suffolk County,
Massachusetts.
15.10 Further Assurances. Borrowers agree to take all further
------------------
actions and execute all further documents as Lender may from time to time
reasonably request to carry out the transactions contemplated by this Agreement.
15.11 Notices. All notices, requests and demands to or upon the
-------
respective parties hereto shall be given in accordance with the Loan Agreement.
15.12 Mutual Waiver of Right to Jury Trial. LENDER AND EACH BORROWER
------------------------------------
EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED
UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT, OR ANY OF
THE AGREEMENTS, INSTRUMENTS OR DOCUMENTS REFERRED TO HEREIN; OR (II) ANY OTHER
PRESENT OR FUTURE
7
<PAGE>
INSTRUMENT OR AGREEMENT BETWEEN OR AMONG THEM; OR (III) ANY
CONDUCT, ACTS OR OMISSIONS OF LENDER OR ANY BORROWER OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
THEM; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK]
8
<PAGE>
Executed under seal as of the date written above.
Video City, Inc. ("Borrower" and "Agent Old Republic Entertainment, Inc.
Borrower") ("Borrower")
/s/ Timothy J. Denari /s/ Tim Denari
___________________________________ ________________________________
Tim Denari Tim Denari
By: _______________________________ By: ____________________________
EVP CFO
Title:_____________________________ Title:__________________________
Sulpizio One, Inc. ("Borrower") Video Tyme, Inc. ("Borrower")
/s/ Tim Denari /s/ Tim Denari
___________________________________ ________________________________
Tim Denari Tim Denari
By: _______________________________ By: ____________________________
CFO CFO
Title:_____________________________ Title:__________________________
Videoland, Inc. ("Borrower") Video Galaxy, Inc. ("Borrower")
/s/ Tim Denari /s/ Tim Denari
___________________________________ ________________________________
Tim Denari Tim Denari
By: _______________________________ By: ____________________________
CFO CFO
Title:_____________________________ Title:__________________________
BANKBOSTON RETAIL FINANCE INC.
("Lender")
/s/ Mark J. Forti
___________________________________
Mark J. Forti
By: _______________________________
Director
Title:_____________________________
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-2000 JAN-31-2000
<PERIOD-START> AUG-01-1999 FEB-01-1999
<PERIOD-END> OCT-31-1999 OCT-31-1999
<CASH> 0 28,718
<SECURITIES> 0 0
<RECEIVABLES> 0 3,134,354
<ALLOWANCES> 0 0
<INVENTORY> 0 19,313,890
<CURRENT-ASSETS> 0 8,131,855
<PP&E> 0 5,368,445
<DEPRECIATION> 0 5,974,897
<TOTAL-ASSETS> 0 39,200,121
<CURRENT-LIABILITIES> 0 37,602,436
<BONDS> 0 15,380,325
0 0
0 6,985,297
<COMMON> 0 149,946
<OTHER-SE> 0 (7,005,278)
<TOTAL-LIABILITY-AND-EQUITY> 0 39,200,121
<SALES> 8,723,038 36,241,069
<TOTAL-REVENUES> 8,723,038 36,241,069
<CGS> 11,826,901 38,895,842
<TOTAL-COSTS> 11,826,901 38,895,842
<OTHER-EXPENSES> 2,722,220 8,174,237
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 462,100 1,744,862
<INCOME-PRETAX> (6,649,871) (10,967,646)
<INCOME-TAX> 0 (546,603)
<INCOME-CONTINUING> (6,801,871) (10,687,080)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,801,871) (10,687,080)
<EPS-BASIC> (0.46) (0.76)
<EPS-DILUTED> (0.46) (0.76)
</TABLE>
