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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 April 30, 2000
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[ ] 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)
9998 Global Road 2/nd/ Floor, Philadelphia, Pennsylvania 19047
(Address of principal executive offices) (Zip Code)
_______________
Registrant's telephone number, including area code: (215) 856-2560
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.
The number of shares of Common Stock outstanding as of June 15, 2000 was
16,442,662.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VIDEO CITY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
2000 2000
----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................... $ 269,259 $ 24,316
Customer receivables................................... 905,945 1,003,578
Notes receivable....................................... --- 9,078
Merchandise inventory ................................. 3,099,937 3,767,919
Other.................................................. 1,179,644 75,000
----------- -----------
Total current assets.................................. 5,454,785 4,879,891
Rental library, (net of accumulated amortization)...... 6,115,695 6,223,364
Property and equipment, net............................ 3,942,862 4,266,665
Goodwill............................................... 4,853,840 4,920,303
Other assets........................................... 849,022 1,003,564
----------- -----------
Total assets.......................................... $21,216,204 $21,293,787
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
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VIDEO CITY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
2000 2000
------------ ------------
Unaudited
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................... $ 24,287,317 $ 23,033,955
Accrued expenses .............................................. 4,596,550 3,069,765
Senior secured revolving credit facility....................... 10,117,505 9,769,574
Current portion of long-term debt.............................. 6,790,454 5,565,078
------------ ------------
Total current liabilities .................................. 45,791,826 41,438,372
Long-term debt, less current portion............................. --- 1,231,907
Other liabilities................................................ 99,456 99,456
------------ ------------
Total liabilities................................................ 45,891,282 42,769,735
------------ ------------
Stockholders' equity (deficit):
Preferred stock................................................ 6,292,135 6,217,135
Common stock, $.01 par value per share, 30,000,000 shares
authorized; 16,245,158 shares issued and outstanding at
April 30, 2000 and 15,767,959 shares issued and outstanding
at January 31, 2000............................................ 162,452 157,679
Additional paid-in capital..................................... 13,528,276 13,268,548
Accumulated deficit ........................................... (44,657,941) (41,119,310)
------------ ------------
Total stockholders' equity (deficit) ....................... (24,675,078) (21,475,948)
------------ ------------
Total liabilities and stockholders' equity (deficit) ....... $ 21,216,204 $ 21,293,787
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
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VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30, April 30,
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Rental revenues and product sales..................................... $ 8,186,084 $13,305,070
Management fee income................................................. 1,316,000 ---
----------- -----------
Total Revenue........................................................... 9,502,084 13,305,070
----------- -----------
Operating costs and expenses:
Store operating expenses.............................................. 4,518,435 7,903,827
Amortization of rental library........................................ 1,992,125 1,772,490
Cost of product sales................................................. 1,524,372 1,960,315
Cost of leased product................................................ 464,177 499,784
Restructuring ........................................................ 1,564,000 ---
General and administrative expenses................................... 2,246,196 2,080,551
----------- -----------
Total operating costs and expenses...................................... 12,309,305 14,216,967
----------- -----------
Loss from operations.................................................... (2,807,221) (911,897)
Other (income) expense
Interest expense, net................................................ 579,407 588,727
Other................................................................ --- (23,318)
----------- -----------
Loss before taxes ...................................................... (3,386,628) (1,477,306)
Income tax expense (benefit)............................................ --- (546,603)
----------- -----------
Net Loss before Dividends............................................... (3,386,628) (930,703)
Dividends............................................................... 152,000 ---
----------- -----------
Net Loss to Common Shareholders......................................... $(3,538,628) $ (930,703)
=========== ===========
Loss per common share data:
Basic Earnings (Loss) Per Share....................................... $(0.22) $(0.07)
Diluted Earnings (Loss) Per Share..................................... $(0.22) $(0.07)
Weighted average number of common shares outstanding
Basic................................................................. 15,979,313 13,639,587
Diluted............................................................... 15,979,313 13,639,587
</TABLE>
See accompanying notes to consolidated financial statements
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VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30, April 30,
2000 1999
------------ ------------
<S> <C> <C>
Increase (Decrease) in cash
Cash flows from operating activities:
Net Loss before Dividends............................................... $(3,386,628) $ (930,703)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................................ 2,557,968 2,256,099
Increase in deferred tax asset........................................ --- (547,484)
Common stock issued for professional services......................... 75,000 34,112
Preferred stock issued in satisfaction of liabilities................. 112,500 ---
Changes in assets and liabilities, net of effects of acquisitions:
Decrease (increase) in customer receivables........................... 106,711 (528,831)
Decrease (increase) in merchandise inventories........................ 667,982 (1,740,046)
Increase in other assets.............................................. (981,713) (433,750)
Increase in accounts payable.......................................... 1,253,362 281,394
Increase (decrease) in accrued expenses............................... 1,526,785 (2,329,706)
Increase in other liabilities......................................... --- 162,000
------------ ------------
Net cash provided by (used in) operating activities..................... 1,931,967 (3,742,803)
------------ ------------
Cash flows from investing activities:
Purchases of rental library, net..................................... (1,884,456) (3,628,174)
Purchases of fixed assets............................................. (143,968) (1,255,869)
Cash portion of purchase price for store acquisitions................. --- (167,036)
------------ ------------
Net cash used in investing activities................................. (2,028,424) (5,051,079)
------------ ------------
Cash flows from financing activities:
Repayment of long-term debt........................................... (6,531) (157,850)
Proceeds from issuance of long-term debt.............................. --- 1,700,000
Proceeds from borrowings under credit facility........................ 347,931 7,199,012
------------ ------------
Net cash provided by financing activities............................. 341,400 8,741,162
------------ ------------
Net increase (decrease) in cash....................................... 244,943 (86,832)
Cash at beginning of period ......................................... 24,316 172,043
------------ ------------
Cash at end of period ................................................ $ 269,259 $ 85,211
</TABLE>
See accompanying notes to consolidated financial statements
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VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30, April 30,
2000 1999
--------- ---------
<S> <C> <C>
Supplementary disclosures of cash flow information
Cash Paid For:
Interest ............................................................. $356,467 $ 419,486
Income taxes...... ................................................... --- $ 17,924
Non-cash investing and financing activities:
Common Stock issued for professional services ........................ $112,500 $ 34,112
Preferred stock issued in satisfaction of liabilities................. $ 75,000 $2,000,000
</TABLE>
For acquisitions consummated during the three months ended April 30, 1999, the
Company paid $167,036, net of cash acquired. In conjunction with the 1999
acquisitions, liabilities were assumed as follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Fair value of assets acquired.......................................... $ 2,547,176
Cash paid.............................................................. (167,036)
Common stock issued.................................................... (641,394)
Preferred stock issued................................................. (1,251,230)
Goodwill............................................................... 3,210,312
-----------
Liabilities assumed................................................ $ 3,697,828
===========
</TABLE>
See accompanying notes to consolidated financial statements.
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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.,
VideoTyme, 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 April 30, 2000, the consolidated statement
of operations for the three months ended April 30, 2000, and the consolidated
statement of cash flows for the three months ended April 30, 2000 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, 2000.
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 April 30, 2000, the results of operations for the
three months ended April 30, 2000 and 1999, and cash flows for the three months
ended April 30, 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.
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2. Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which contemplates the
realization of assets and the satisfaction of liabilities in the ordinary course
of business. The carrying amounts of assets and liabilities presented in the
financial statements do not purport to represent realizable or settlement
values. However, the Company has suffered recurring operating losses and has a
working capital deficit and stockholders' deficit at April 30, 2000. The Company
is also in default of its debt agreements. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The Consolidated
Financial Statements do not include any adjustments that might result from the
outcome of this uncertainty. The report of our Independent Certified Public
Accountants included in our Annual Report on Form-10K for the year ended January
31, 2000 contains an explanatory paragraph regarding the uncertainty of the
Company's ability to continue as a going concern.
3. 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.
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.
4. Recent Developments
On March 3, 2000, Video City and West Coast Entertainment Corporation ("West
Coast") entered into a Management Agreement, pursuant to which Video City will
manage and operate West Coast's business until the
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closing of the proposed merger between Video City and West Coast. The Management
Agreement provides that West Coast shall pay management fees for Video City's
management services in an amount equal to certain percentages of gross revenues
actually collected from the West Coast business less all selling, general and
administrative costs and expenses of West Coast incurred and paid in the
ordinary course of business. Under the Management Agreement, the management fee
paid to Video City, in no event shall be less than $400,000 per calendar month.
West Coast may terminate the Management Agreement on or after August 31, 2000.
Concurrent with the execution of the Management Agreement, the directors and
executive officers of West Coast resigned and Video City moved its principal
executive offices from Torrance, California to Philadelphia, Pennsylvania.
In conjunction with the merger, Video City, Inc. entered into consulting, non-
compete and international service agreements with former members of West Coast's
management that provide for total payments of $5,900,000. The payments are to be
made over approximately seven years in amounts not to exceed $800,000 per year,
subject to acceleration if West Coast's bank debt is repaid. The first
$2,000,000 of aggregate payments is secured by 1,357,282 shares of Video City
common stock owned by Video City's Chief Executive Officer. Video City has
agreed to make payments aggregating $412,500 prior to consummation of the
merger, of which $334,166 were made during the quarter ended April 30, 2000. The
costs have been recorded as merger costs, included in other current assets.
In March 2000, after entering into the Management Agreement with West Coast and
in anticipation of the proposed merger between the Company and West Coast, the
Company's management, in an effort to improve the performance of its operations,
decided to move its corporate facility and streamline its corporate expenses. As
a result of restructuring its operations, the Company has recognized a charge of
approximately $1.6 million in the first quarter of fiscal 2001. The
restructuring charge mainly consisted 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.
The Company is negotiating the sale of a significant number of its stores and is
entertaining several offers. The proceeds from these divestitures will be used
to eliminate the Company's indebtedness under its existing credit facility and
to improve its liquidity and working capital. In addition, under the pending
merger and Management Agreement with West Coast, the Company is currently
negotiating to divest a number of West Coast's video stores,
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with the proceeds being used to pay the cash portion necessary to complete the
restructuring of West Coast's existing indebtedness and the merger. The stores
for sale were strategically selected, to concentrate the Company's operations in
efficient geographic areas. Management believes that the successful
implementation of these plans will permit the merger to proceed and will result
in a stronger combined company. There can be no assurance that these objectives
can be successfully completed or that the resultant company will be profitable.
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.
Results of Operations
Three months ended April 30, 2000 compared to the three months ended April
30,1999.
Revenues
Rental revenue and product sales for the three months ended April 30, 2000
decreased by $5,118,986 or 38.5%, to $8,186,084 compared to $13,305,070 for the
three months ended April 30, 1999. The decreased revenues were primarily
attributable to the divestiture of 49 stores located in the states of Washington
and Oregon to Blockbuster, Inc. on July 26, 1999, partially offset by the
acquisition of 15 Video Galaxy Stores on March 31, 1999. At April 30,
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2000 the Company had 75 stores operating in ten states compared to 135 stores
operating in twelve states at April 30, 1999. The Company had management fee
income of $1,316,000 related to the "Management Agreement" entered into with
West Coast Entertainment Corporation on March 3, 2000 for the quarter ended
April 30, 2000. The Company had no management fee income for the quarter ended
April 30, 1999.
Store Operating Expenses
Store operating expenses for the three months ended April 30, 2000 decreased by
$3,385,392 or 42.8% to $4,518,435 compared to $7,903,827 for the three months
ended April 30, 1999. The decrease in store operating expenses was primarily
due to the divestiture of 49 stores located in the states of Washington and
Oregon to Blockbuster, Inc. on July 26, 1999, partially offset by the
acquisition of 15 Video Galaxy Stores on March 31, 1999. Store operating
expenses as a percentage of rental revenues and product sales were 55.2% for the
three months ended April 30, 2000 compared to 59.4% for the corresponding period
of 1999.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory increased by $219,635 or 12.4% to
$1,992,125 compared to $1,772,490 for the three months ended April 30, 1999. The
primary reason for the increase was that the Company adopted an accelerated
method of amortizing its rental inventory. This was partially offset by the
divestiture of 49 stores located in the states of Washington and Oregon to
Blockbuster, Inc. on July 26, 1999. 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. Amortization of videocassette
rental inventory as a percentage of rental revenues and product sales for the
period ending April 30, 2000 was 24.3% compared to 13.3% for the period ending
April 30, 1999.
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Cost of Product Sales
Cost of product sales for the three months ended April 30, 2000 decreased by
$435,943 or 22.2% to $1,524,372 compared to $1,960,315 for the corresponding
period of 1999. The decrease in the cost of product sales for the three months
ended April 30, 2000 was primarily due to the divestiture of 49 stores located
in the states of Washington and Oregon to Blockbuster, Inc. on July 26, 1999,
partially offset by the acquisition of 15 Video Galaxy Stores on March 31, 1999.
Cost of product sales as a percentage of rental revenues and product sales, was
18.6% for the three months ended April 30, 2000, compared to 14.7% for the same
period of 1999. The increase is primarily due to increased sales of previously
viewed tapes.
Cost of Leased Product
Cost of leased product for the three months ended April 30, 2000 decreased
$35,607 or 7.1% to $464,177 compared to $499,784 for the corresponding period of
1999. The decrease was primarily attributable to divestiture of 49 stores
located in the states of Washington and Oregon to Blockbuster, Inc. on July 26,
1999, partially offset by the acquisition of 15 Video Galaxy Stores on March 31,
1999. Cost of leased product as a percentage of rental revenues and product
sales, was 5.6% for the three months ended April 30, 2000, compared to 3.8% for
the same period of 1999. The increase was primarily due to the Company
purchasing more product this period under studio revenue sharing agreements.
General and Administrative Expenses
General and administrative expenses increased $165,645 or 7.9%, to $2,246,196
for the three months ended April 30, 2000, compared to $2,080,551 for the
corresponding period of 1999. The increase in general and administrative
expenses was primarily attributable to the company incurring higher costs for
salaries during the period ending April 30, 2000. In addition, the Company
incurred additional costs for professional services and travel in connection
with the "Management Agreement". General and administrative expenses as a
percentage of total revenues was 23.6 % for the three months ended April 30,
2000 compared to 15.6% for the same period in 1999.
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Restructuring Costs
The Company has incurred $1,564,000 in restructuring costs during the period
ending April 30, 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.
Interest Expense
Interest expense decreased $9,320 or 1.6%, to $579,407 for the three months
ended April 30, 2000, compared to $588,727 for the corresponding period in 1999.
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 April 30, 1999, due to
the acquisitions of Videoland and Video Galaxy, the Company determined from its
projections, that it was more likely than not that future taxable income would
be sufficient to enable the Company to realize its deferred tax assets and had
accordingly not recorded a valuation allowance for its deferred tax asset.
However, due to the pending acquisition with West Coast Entertainment, the
Company's short-term divestiture strategy the losses incurred during fiscal 2000
and the first quarter of fiscal 2001, management cannot determine that it is
more likely than not that future taxable income will be sufficient to realize
the deferred tax asset. Accordingly, a full valuation allowance has been
established against the deferred tax asset at April 30, 2000.
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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 vendor terms will be
sufficient to fund future videocassette and other inventory purchases and other
working capital needs for its existing stores. There can be no assurance,
however, that cash from operations and extended vendor terms will be sufficient
to fund future videocassette and inventory purchases.
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.
The Company has suffered recurring operating losses and has a working capital
deficit and a stockholders' deficit at April 30, 2000. The Company is also in
default under its debt agreements. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The report of our
Independent Certified Public Accountants included in our Annual Report on Form-
10K for the year ended January 31, 2000, contains an explanatory paragraph
regarding the uncertainty of the Company's ability to continue as a going
concern.
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 provided 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
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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 was granted
waivers by BankBoston for the quarters ended April 30, 1999 and July 31, 1999.
On September 23, 1999, the Company entered into a forbearance 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
forbearance 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. On
March 9, 2000, the Company entered into a second Forbearance Agreement with the
BankBoston, after the September 10, 1999 Forbearance Agreement expired. Subject
to the terms of the second Forbearance Agreement, the Credit Facility was
limited to $10,750,000, and the financial performance covenants were revised. On
May 20, 2000, the Company entered into a third Forbearance Agreement with
BankBoston, after not meeting certain financial covenants in the second
Forbearance Agreement. Under the terms of the Third Forbearance Agreement,
BankBoston is modifying the terms of the Loan Agreement to allow borrowing under
the Credit Facility to be increased and temporarily limited to $11,250,000 and
has instituted additional performance covenant requirements. BankBoston at its
discretion is continuing to make advances in accordance with the Loan Agreement.
There can be no assurance, however, that BankBoston will continue to make
advances in the future under the terms of the Loan Agreement. The Company has
classified the senior secured revolving credit facility as a current liability.
As of April 30, 2000, the total outstanding balance under the BankBoston credit
facility was $10,117,000 and the availability on the credit facility was
approximately $383,000. As of June 15, 2000, the total outstanding balance under
the BankBoston credit facility was approximately $11,536,000, with current
availability at the discretion of the bank.
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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 April 30, 2000 and 1999 since the note related thereto substantially
bears interest at a floating rate based upon the lenders' "prime" rate.
Cash Flows
Three Months Ended April 30, 2000 Compared to the Three Months Ended April 30,
1999
The increase in net cash provided by operating activities of $5,675,000 for the
three months ended April 30, 2000 compared to the three months ended April 30,
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 used in investing activities decreased by $3,023,000 for
the three months ended April 30, 2000 compared to the three months ended
April 30, 1999 primarily due to a decrease in the purchases of videocassette
rental inventory and fixed assets resulting from the reduction in the number of
stores. Net cash provided by financing activities decreased $8,400,000 for the
three months ended April 30, 2000 compared to the three months ended April 30,
1999 mainly due to decreased borrowings under the credit facility.
Year 2000
The Company has not experienced and does not anticipate any material adverse
effects on its production equipment, systems or operations as a result of Year
2000 issues. Business is continuing as usual, and internal equipment and systems
will continue to be monitored for any likely disruptions. Further, as of June
10, 2000, the Company has not experienced any operational difficulties as a
result of Year 2000 issues with its vendors, suppliers or other critical third
parties with whom the Company conducts business. However, Year 2000 compliance
has many elements and potential consequences, some of which may not be
foreseeable or may be realized in future periods. Consequently,
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there can be no assurance that unforeseen circumstances may not arise, or that
the Company will not in the future identify equipment or systems which are not
Year 2000 compliant.
Although the transition to the Year 2000 did not have any significant impact on
the Company or its equipment, systems and operations, the Company will continue
to monitor the impact of the Year 2000 on its equipment and systems and those of
its vendors, suppliers and other critical third parties. The contingency plans
that were developed for use in the event of Year 2000-related failures will be
maintained and generalized for ongoing business use.
In the aggregate, the Company has spent approximately $25,000 to address Year
2000 issues and does not anticipate spending any additional material amounts
relating to Year 2000 issues.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On February 15, 2000, the Company issued 150,000 shares of the Company's Common
Stock to a vendor in satisfaction of certain outstanding payables.
On February 15, 2000, the Company issued 50 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share to a
professional firm in consideration for certain professional services previously
provided to the Company by such firm. 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 February 15, 2000 the Company issued 25 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share to a
financial advisor in consideration for certain financial advisory services
previously provided to the Company. 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.
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The Company believes that the issuance of securities in each of the foregoing
transactions was exempt from registration in reliance on Section 4(2) of the
Securities Act of 1933, as amended, as a transaction not involving a public
offering.
Item 3. Defaults Upon Senior Securities
The Company is in default of its senior secured revolving credit facility with
BankBoston. The amount outstanding as of April 30, 2000 was $10,117,505. The
Company has been operating under certain forbearance agreements. During the
quarter ended April 30, 2000 the Company was not in compliance with the
financial performance covenants as set forth in the forbearance agreements. On
May 20, 2000, the Company entered into a third Forbearance Agreement with
BankBoston which allows borrowing under the Credit Facility to be increased to
$11,250,000 and includes additional performance covenant requirements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K
On March 30, 2000, the Company filed a current report on form 8-K, Dated March
3, 2000, to report under Item 5 the Management Agreement entered into by and
between Video City, Inc. and West Coast Entertainment Corporation, and Item 7.
Exhibits 10.1 and 10.2, Management Agreement dated as of March 3, 2000, by and
between Video City, Inc., Keystone Merger Corp and West Coast Entertainment
Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signesd on its behalf by the
undersigned thereunto duly authorized.
Video City, Inc.
---------------
(Registrant)
June 19, 2000 /S/ Robert Y. Lee
-----------------
Robert Y. Lee
Chief Executive Officer
(Principal Executive Officer)
---------------------------
June 19, 2000
/S/ Rudolph R. Patino
---------------------
Rudolph R. Patino
Chief Financial Officer
(Principal Financial Officer)
---------------------------
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