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United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-14023
VIDEO CITY, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3897052
(State of incorporation) (I.R.S. Employer Identification Number)
4800 Easton Drive, Suite 108, Bakersfield, California 93309
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (661) 634-9171
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.
Registrant's number of shares of common stock outstanding as of
December 20, 2002 was 6,298,724.
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Table of Contents
10-Q
PART 1.................................................................... 2
Item 1.................................................................... 3
Balance Sheet Assets...................................................... 2
Balance Sheet Liabilities................................................. 3
Income Statement.......................................................... 4
Cash Flow Statemnent...................................................... 5
Table 5................................................................... 7
Table 6................................................................... 7
Item 2.................................................................... 15
PAT II.................................................................... 25
Item 2.................................................................... 25
Item 3.................................................................... 19
Item 6.................................................................... 25
Exhibit 27 Table.......................................................... 20
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VIDEO CITY, INC.
CONSOLIDATED BALANCE SHEETS
October 31, January 31,
2002 2002
---------- ----------
(Unaudited) (Audited)
ASSETS
Current assets:
Customer receivables .............................. $ 142,012 $ 377,033
Merchandise inventory ............................. 214,976 529,334
Assets held for sale .............................. 2,049,354 --
Other ............................................. 102,078 74,270
---------- ----------
Total current assets ........................... 2,508,420 980,637
Rental library, net ................................. 1,065,406 2,261,331
Property and equipment, net ......................... 624,710 1,215,146
Goodwill ............................................ 1,008,429 1,787,361
Other assets ........................................ 268,331 346,645
---------- ----------
Total assets ................................... $5,475,296 $6,591,120
========== ==========
See accompanying notes to consolidated financial statements
Page 3
VIDEO CITY, INC.
CONSOLIDATED BALANCE SHEETS
October 31, January 31,
2002 2002
------------ ------------
(Unaudited) (Audited)
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities:
Bank overdraft .......................................... $ 84,158 $ 103,582
Accounts payable ........................................ 2,523,845 1,666,978
Accrued Expenses ........................................ 778,542 1,052,653
Note payable ............................................ 39,269 48,262
Current portion of tax liability ........................ 178,581 149,880
Other liabilities ....................................... 94,904 332,829
------------ ------------
Total current liabilities ............................. 3,699,299 3,354,184
Senior Subordinated Convertible Notes Payable
(net of unamortized discount of $330,158) .............. 552,262 --
Shares issuable under plan of reorganization ............ 216,176 1,750,000
Deferred tax liability .................................. 136,000 136,000
Tax liability less current portion ...................... 438,934 431,759
------------ ------------
Total liabilities Not Subject to Compromise ............... 5,042,671 5,671,943
------------ ------------
LIABILITIES SUBJECT TO COMPROMISE
Accounts payable .......................................... 315,400 956,347
------------ ------------
Total Liabilities Subject to Compromise ............... 315,400 956,347
------------ ------------
Total Liabilities ......................................... 5,358,071 6,628,290
------------ ------------
STOCK HOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value per share, 30,000,000 shares
authorized; 6,256,724 shares issued and outstanding
at October 31, 2002 and 0 shares
issued and outstanding at January 31, 2002 ............. 62,567 --
Additional paid-in capital .............................. 21,623,725 19,683,530
Accumulated (deficit) ................................... (21,569,067) (19,720,700)
------------ ------------
Total stockholders' equity (deficit) ................. 117,225 (37,170)
------------ ------------
Total liabilities and stockholders' equity ................ $ 5,475,296 $ 6,591,120
============ ============
See accompanying notes to consolidated financial statements
Page 4
VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Rental revenues and product sales ..................... $ 1,954,116 $ 2,145,989 $ 6,409,658 $ 7,683,114
Management fee income ................................. -- -- -- 7,143
------------ ------------ ------------ ------------
TOTAL REVENUES .......................................... 1,954,116 2,145,989 6,409,658 7,690,257
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Store operating expenses .............................. 1,408,232 1,376,346 4,235,572 4,672,910
Amortization of rental library ........................ 462,863 781,179 1,350,084 2,473,950
Cost of product sales ................................. 460,310 193,343 1,117,694 942,582
Cost of leased product ................................ -- -- -- 37,712
General and administrative expenses ................... 659,576 815,174 1,788,862 2,325,401
Impairment of goodwill ................................ 117,608 -- 117,608 --
------------ ------------ ------------ ------------
TOTAL OPERATING COSTS AND EXPENSES ...................... 3,108,589 3,166,042 8,609,820 10,452,555
Loss from operations before reorganization items ........ (1,154,473) (1,020,053) (2,200,162) (2,762,298)
Other (Income) expense
Interest expense, net ................................. 156,367 -- 244,842 12,500
Other ................................................. -- (74,107) -- (184,003)
------------ ------------ ------------ ------------
Loss before reorganization items ........................ (1,310,840) (945,946) (2,445,004) (2,590,795)
Reorganization items:
Professional fees ..................................... -- -- -- 417,577
(Gain) Loss on sale of assets ......................... -- -- -- (34,600)
Relocation of Corporate Office ........................ -- -- -- 57,925
------------ ------------ ------------ ------------
Net loss from continuing operations ..................... (1,310,840) (945,946) (2,445,004) (3,031,697)
------------ ------------ ------------ ------------
Discontinued operations:
Loss (Gain) on discontinued operations ................ 151,300 171,638 (60,626) (60,800)
------------ ------------ ------------ ------------
Loss before extraordinary items ......................... (1,462,140) (1,117,584) (2,384,378) (2,970,897)
------------ ------------ ------------ ------------
Extraordinary items:
Troubled debt restructuring gain, net of tax .......... -- -- -- 8,951,429
Discharge of liabilities subject to compromise
(Note 2) ............................................. -- 32,769,523 536,011 32,769,523
------------ ------------ ------------ ------------
Total extraordinary items ............................... -- 32,769,523 -- 41,720,952
------------ ------------ ------------ ------------
Net income (loss) ....................................... $ (1,462,140) $ 31,651,939 $ (1,848,367) $ 38,750,055
============ ============ ============ ============
Basic and diluted loss per common share from continuing
operations ............................................. $ (0.21) $ (0.06) $ (0.50) $ (0.19)
Basic and diluted gain (loss) per common share from
discontinued operations ................................ $ (0.03) $ (0.01) $ 0.02 $ 0.01
Basic and diluted income per common share from
extraordinary item ..................................... $ 0.00 $ 1.99 $ 0.11 $ 2.54
Basic and diluted net income (loss) per common share..... $ (0.24) $ 1.93 $ (0.38) $ 2.36
Weighted average number of common shares outstanding
basic and diluted ...................................... 6,256,724 16,442,662 4,928,066 16,442,662
See accompanying notes to consolidated financial statements
Page 5
VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
----------------------------
October 31, October 31,
2002 2001
------------ ------------
Increase (decrease) in cash
Cash flows from operating activities:
Net income (loss) ................................................... ($ 1,848,367) $ 38,750,055
Adjustments to reconcile net income (loss) to net cash provided by
perating activities:
Depreciation and amortization ..................................... 1,834,892 4,770,735
Extraordinary item - troubled debt restructuring .................. -- (8,951,429)
Impairment of goodwill ............................................ 117,608 --
Extraordinary item - discharge of liabilities subject to
compromise ...................................................... (536,011) (32,769,523)
Discontinued operations ........................................... (60,626) --
Amortization of beneficial conversion ............................. 117,914 --
Warrants issued for expenses ...................................... 37,363 --
(Gain) Loss on sale of asset ...................................... -- (34,600)
Changes in assets and liabilities:
Decrease in customer receivables .................................. 132,240 37,798
Decrease (increase) in other receivables .......................... -- 946,655
Decrease in merchandise inventories ............................... 197,215 394,340
Increase in other assets .......................................... (36,816) (101,913)
Increase in accounts payable and liabilities
subject to compromise ............................................ 854,911 1,334,377
Increase in accrued expenses and liabilities
subject to compromise ............................................ 101,713 225,647
Decrease in notes payable ......................................... (8,993) --
Decrease in other liabilities and liabilities
subject to compromise ............................................ (291,270) (27,202)
------------ ------------
Net cash provided by operating activities ........................... 611,773 4,574,940
------------ ------------
Cash flows from discontinued operations ............................. 1,627,128 --
------------ ------------
Cash flows from investing activities:
Purchases of videocassette rental library, ........................ (2,592,075) (3,937,478)
Purchases of fixed assets ......................................... (84,091) (292,820)
Proceeds from sale of assets ...................................... -- 134,370
------------ ------------
Net cash used in investing activities ............................... (2,676,166) (4,095,928)
------------ ------------
Cash flows from financing activities:
Decrease in bank overdraft ........................................ (19,424) --
Proceeds from the issuance of common stock ........................ 1,214 --
Proceeds from notes payable ....................................... 455,475 --
Proceeds from borrowing (repayment) under credit facility ......... -- (1,500,000)
------------ ------------
Net cash provided by (used in) financing activities ................. 437,265 (1,500,000)
------------ ------------
Net increase (decrease) in cash ..................................... 0 (1,020,988)
Cash at beginning of period ......................................... 0 1,046,164
------------ ------------
Cash at end of period ............................................... $ 0 $ 25,176
============ ============
See accompanying notes to consolidated financial statements
Page 6
VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-------------------------
October 31, October 31,
2002 2001
----------- -----------
Supplementary disclosures of cash flow information
Cash Paid For:
Interest .......................................................... $ 52,800 $ 12,500
Reorganization items .............................................. -- 228,061
Non-cash investing and financing activities:
Troubled debt restructuring ...................................... -- 8,951,429
Discharge of liabilities subject to compromise ................... 536,011 34,169,523
Cancellation of preferred stock .................................. 6,292,135
Cancellation of common stock ..................................... -- 13,741,395
Warrants issued for expenses ..................................... 37,363 --
Liability for shares issueable under plan of reorganization ...... -- 1,750,000
Value of warrants and beneficial conversion related to issuance of
$742,420 Senior Subordinated Convertible Notes .................. 467,725 --
Accrued expenses relieved in exchange for $389,583 in
Senior Subordinated Convertible Notes ........................... 389,583 --
Par value of common stock issued according to the
Plan of Reorganization........................................... 61,353 --
Excess over the par value of common stock issued
according to the Plan of Reorganization.......................... 1,472,471 --
See accompanying notes to consolidated financial statements.
Page 7
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" or "Video City") or 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 statements of operations for the three and nine months ended
October 31, 2001, and the consolidated statements of cash flows for the nine
months ended October 31, 2001 are unaudited and have been prepared in accordance
with the American Institute of Certified Public Accountants Statement of
Position 90-7, Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code. The financial statements have been prepared using accounting
principles applicable to a going concern, which assumes realization of assets
and settlement of liabilities in the normal course of business. The
appropriateness of using the going concern basis is dependent upon, among other
things, the ability to comply with debtor-in-possession financing agreements,
confirmation of a plan of reorganization, the ability to achieve profitable
operations, and the ability to generate sufficient cash flow from operations to
meet its obligations.
The accompanying interim consolidated financial statements reflect all
adjustments that are, in the opinion of management, necessary to present fairly
the financial position as of October 31, 2002, the results of operations for the
three and nine months ended October 31, 2002 and 2001, and cash flows for the
nine months ended October 31, 2002 and 2001. 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. 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, 2002.
The accompanying consolidated balance sheets as of January 31, 2002 and
October 31, 2002 segregates liabilities subject to compromise, which represents
claims still in dispute, from liabilities not subject to compromise, such as
liabilities arising subsequent to filing bankruptcy.
Page 8
Reorganization items represent expenses incurred by the Company as a result of
the bankruptcy filing and proceedings, which are required to be expensed as
incurred.
2. Bankruptcy
On July 30, 2001, the Bankruptcy Court entered an Order confirming Video City's
First Amended Chapter 11 Plan of Reorganization (the "Plan"). The Plan became
effective on August 29, 2001. The proceedings began on August 17, 2000, when
Fleet Retail Finance ("Fleet") purported to accelerate the outstanding
indebtedness under the Company's secured credit facility. On August 24, 2000 as
a result of the Fleet action, the Company and its subsidiaries filed a voluntary
petition in the United States Bankruptcy Court for the Central District of
California (the "Bankruptcy Court") seeking to reorganize under Chapter 11 of
the U.S. Bankruptcy Code. Pursuant to the Plan, the then existing common
shareholders of Video City were to receive 700,000 shares of common stock of
Reorganized Video City in cancellation of all shares of common stock outstanding
prior to such distribution, for pro rata distribution; 700,000 shares of common
stock were to be issued in cancellation of all shares of preferred stock
outstanding prior to such distribution to preferred shareholders; and 5,600,000
shares of common stock were to be issued to Video City's creditors. The Company
anticipated that all liabilities subject to compromise would receive shares of
common stock of Video City in full satisfaction of their claims based on the
Plan. As part of the Plan certain class 4A creditors had the option to receive
20% of their claims in cash if their claims was under $1,000 or if they choose
to reduce their claims to that amount. The total amount for all class 4A
creditors who opted for the cash payout was less than $22,000. In addition,
certain tax obligations of approximately $1.3 million are to be paid in cash
over five years from the date of assessment, of which approximately $1.1 million
has been reclassified out of liabilities subject to compromise.
The Company was required to issue 7,000,000 shares of new common stock of
reorganized Video City. The holders of existing voting shares immediately before
the confirmation received more than 50% of the voting shares of the emerging
entity and therefore the Company did not adopt fresh-start reporting upon its
emergence from Chapter 11. Liabilities compromised by the Plan were stated at
the present value of the amounts to be paid, and the forgiveness of debt has
been reported as an extraordinary item.
Page 9
On August 29, 2001, the effective date of the Plan, liabilities subject to
compromise totaling $34,169,523 were discharged. Subsequently, the Company
settled with two taxing authorities and received amended tax claims which
reduced the tax liability by $536,011. The remaining balance is still in
dispute. At October 31, 2002, the balance sheet reflects a liability in the
amount of $216,176 for 864,705 shares of common stock still to be issued
according to the terms of the Plan. The estimated fair value of the common stock
of $0.25 was determined by the board of directors based on pre-petition trading
prices converted at the ratio of common stock issued to the existing common
shareholders in the Plan.
3. Senior Subordinated Convertible Notes Payable
On May 10, 2002 the Company initiated a private placement offering to accredited
investors (sometimes referred to herein as the "Private Placement" or "Private
Placement Offering"). The Private Placement Offering was to purchase Series A
Units with each unit consisting of a $10,000 10% Senior Subordinated Convertible
Note due November 1, 2003 and a Series A Warrant to purchase 20,000 shares of
the Company's common stock at the exercise price of $0.01 per share. The Company
offered a minimum of 50 units and a maximum of 100 units at a price of $10,000
per unit. The units, convertible notes, warrants and underlying common stock
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), or with any securities regulatory authority of any
jurisdiction. As of July 31, 2002 the Company had closed the first round with 74
units sold for an aggregate principal amount of $742,420 with an interest rate
of 10% per annum. Principal on these convertible notes is payable in one
installment plus accrued but unpaid interest on November 1, 2003. Interest shall
be payable semi-annually in arrears on the first day of November and May of each
year, commencing November 1, 2002. The convertable notes shall be convertible at
the election of the payee into common stock of the Company at a conversion price
of $1.00 per share. The market price of the common stock and the relative fair
value of the convertible notes in relation to the conversion price of these
convertible notes created a beneficial conversion amount of $66,818, and is
recorded as a note discount that is amortized over the life of the notes.
In connection with issuance of the convertible notes, the Company issued
one-year warrants to purchase 1,484,840 shares of the Company's common stock at
an exercise price of $0.01 per share. The Company recorded the fair value of
these warrants at $400,907 using the Black-Scholes model, as a note discount
which is being amortized over the life of the convertible notes as interest
expense.
Page 10
In September and October the Company sold an additional 14 Series A Units for an
aggregate amount of $140,000 and issued additional one-year warrants to purchase
280,000 shares of the Company's common stock at an exercise price of $0.01 per
share.
4. Earnings Per Share
Basic earning per share 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 earning per share 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.
11,579,148 common stock options and warrants were not included in the
computations of diluted earnings per share for the three and nine months ended
October 31, 2001 because their exercise would have an antidilutive effect on
earnings per share. 1,250,000 common stock options and 1,764,840 warrants to
purchase common stock were not included in the computations of diluted earnings
per share for the three and nine months ended October 31, 2002 because their
exercise and/or conversion would have an antidilutive effect on earnings per
share.
5. Discontinued Operations
On October 24, 2002 the Board of Directors approved the disposition of 19 of its
40 retail video stores (the "19 Stores") to M.G. Midwest, Inc., a Delaware
corporation ("Movie Gallery"). The 19 Stores representes all stores owned by the
Company outside of California and includes certain assets and liabilities
related to the 19 Stores. The disposition was effected pursuant to an Asset
Purchase Agreement between the Company and Movie Gallery, dated October 24,
2002. The 19 Stores represented approximately 38% of the Company's total assets.
The aggregate cash purchase price for the 19 Stores was $2,080,500, which was
determined as a result of arms-length negotiations between the Company and Movie
Gallery. Of the $2,080,500 purchase price, Movie Gallery paid the Company
$2,030,500 at the closing of the transaction on November 6, 2002. The remaining
$50,000 is payable by September 10, 2003, and is contingent upon the level of
gross revenues attained by one of the 19 Stores located in Nampa, Idaho.
Page 11
The sale of the stores has been accounted for as "Discontinued Operations" and
the assets related to the sale of the stores have been reported as "Assets Held
for Sale" at October 31, 2002, in accordance with Statement of Financial
Accounting Standards No. 144.
The statements of operations have been restated to show the net effect of the
discontinuance of the 19 stores sold.
Three Months Ended Nine Months Ended
----------------------- -----------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
---------- ---------- ---------- ----------
REVENUES:
Rental revenues and product sales .. $1,539,803 $1,716,375 $4,977,233 $5,297,711
---------- ---------- ---------- ----------
TOTAL REVENUES ....................... 1,539,803 1,716,375 4,977,233 5,297,711
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Store operating expenses ........... 993,388 1,115,644 2,912,832 3,100,385
Amortization of rental library ..... 514,850 566,404 1,566,502 1,667,367
Cost of product sales .............. 182,865 205,965 437,273 465,429
Cost of leased product ............. -- -- -- 3,730
---------- ---------- ---------- ----------
TOTAL OPERATING COSTS AND EXPENSES ... 1,691,103 1,888,013 4,916,607 5,236,911
---------- ---------- ---------- ----------
Loss (Gain) on discontinued operations $ 151,300 $ 171,638 $ (60,626) $ (60,800)
No general corporate overhead and interest expense has been allocated to these
19 stores.
6. New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
Company believes the adoption of this Statement will have no material impact on
its financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 requires that these long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred.
SFAS 144 is effective for financial statements issued for fiscal years beginning
after December 15,
Page 12
2001 and, generally, are to be applied prospectively. The Company sold 19 stores
which assets are refeclted as held for sale at October 31, 2002 and the related
operations are reflected as discontinued operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement eliminates the current requirement that gains and
losses on debt extinguishment must be classified as extraordinary items in the
income statement. Instead, such gains and losses will be classified as
extraordinary items only if they are deemed to be unusual and infrequent, in
accordance with the current GAAP criteria for extraordinary classification. In
addition, SFAS 145 eliminates an inconsistency in lease accounting by requiring
that modifications of capital leases that result in reclassification as
operating leases be accounted for consistent with sale-leaseback accounting
rules. The statement also contains other nonsubstantive corrections to
authoritative accounting literature. The changes related to debt extinguishment
will be effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for transactions occurring after
May 15, 2002. The Company has previously reported in its' consolidated financial
statements, extraordinary income that arose as a result of the bankruptcy and
the approval of the Plan of Reorganization. Consequently, the Company is
considering the reclassification of this extraordinary income in accordance with
SFAS 145 in the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses accounting for restructuring and
similar costs. SFAS No. 146 supercedes previous accounting guidance, principally
Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will adopt the
provisions of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF No. 94-3, a liability for an exit cost was recognized at the date of
a company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amount recognized.
Page 13
7. Adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") on February 1, 2002. In
accordance with the requirements of SFAS 142, during the nine months ended
October 31, 2002, the Company:
o Evaluated the balance of goodwill and other intangible assets recorded
on the consolidated balance sheet as of February 1, 2002. No
reclassifications were required to be made in order to conform to the
new criteria for recognition.
o Determined that there were no intangible assets (other than goodwill)
with indefinite useful lives.
o Determined that the Company only has one reporting unit that is Video
City, Inc. to be used to test for goodwill impairment in accordance
with SFAS 142.
o As required by SFAS 142, the Company determined the fair value of the
reporting unit and compared it to the carrying value of goodwill
effective February 1, 2002. No impairment of the carrying value of
goodwill has been recorded upon adoption of SFAS 142.
As required under SFAS No. 142, with effect from February 1, 2002, we eliminated
the amortization of goodwill. The following table represents a reconciliation of
net income (loss) and per share data that would have been reported had the new
rules been in effect during the three months and nine months ended October 31,
2002 (in thousands, except per share data):
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
------------- -------------- ------------- --------------
Reported net income (loss) .................. $ (1,462,140) $ 31,651,939 $ (1,848,367) $ 38,750,055
Add back goodwill amortization, net of tax .. -- 31,338 -- 94,014
------------- -------------- ------------- --------------
Adjusted net income (loss) .................. $ (1,462,140) $ 31,683,277 $ (1,848,367) $ 38,844,069
------------- -------------- ------------- --------------
Basic and diluted net income (loss) per
common share
Reported net income (loss) .................. $ (0.24) $ 1.93 $ (0.38) $ 2.36
Goodwill amortization, net of tax ........... -- $ 0.00 -- $ 0.01
------------- -------------- ------------- --------------
Adjusted net income (loss) .................. $ (0.24) $ 1.93 $ (0.38) $ 2.37
------------- -------------- ------------- --------------
In accordance with FAS 142, the goodwill has been re-evaluated based on the
recent sale of 19 stores (Note 5) and the Company recorded an impairment of
goodwill of $117,608 in the period ended October 31, 2002.
Page 14
8. Subsequent Event
On November 6, 2002, the Company completed the disposition of the 19 stores
to Movie Gallery. The 19 Stores represented all stores owned by the Company
outside of California and included certain assets and liabilities related to
the 19 Stores. (Refer to Note 5).
On November 6, 2002, in conjunction with the sale of the 19 stores to Movie
Gallery, the Company presented to holders of Series A units in the Private
Placement an opportunity to be paid in full on the balance of their Series A
Units, including interest due, or to roll up to 65% of their investment back
into the Private Placement. In consideration, the Company offered each Series A
Unit holder an additional warrant for each dollar of principal rolled over into
the Private Placement. The conditions and terms would remain the same as the
initial terms of the Private Placement Offering. The total principal of
convertible notes remaining outstanding after the completion of the rollover was
$387,752.
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, 2002.
Estimates and Critical Accounting Policies
Estimates and critical accounting policies and judgments made by management are
an integral part of financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). Actual
results may be different from estimated amounts included in the financial
statements.
Page 15
management believes that the following critical accounting policies address the
significant estimates required of management when preparing the consolidated
financial statements in accordance with GAAP:
o The amortization method of the rental library of the Company records
base stock (generally 3 copies per title for each store) at cost and
amortizes a portion of these costs on an accelerated basis over three
months, generally to $8 per unit, with the remaining base stock cost
amortized on a straight line basis over 33 months to an estimated $3
salvage value. The cost of non base stock (generally greater than 3
copies per title for each store) is amortized on an accelerated basis
over three months to an estimated $3 salvage value. Video games are
amortized on an accelerated basis over a 12 month period to an
estimated $10 salvage value.
o Customer receivable balances represent extended viewing fees charged
on rentals and are evaluated on a continual basis. Allowances are
provided for against potentially uncollectable accounts based on
management's estimate of the collectability of customer accounts.
Allowance adjustments are charged to operations in the period in which
the facts that give rise to the adjustments become known.
o Goodwill represents the excess of the cost of the companies previously
acquired over the fair value of their net assets at the dates of
acquisition. Periodically, the Company reviews the recoverability of
goodwill. The measurement of possible impairment is based primarily on
the ability to recover the balance of the goodwill from the expected
future operating cash flows on an undiscounted basis. In accordance
with SFAS No. 142, Goodwill has been evaluated for impairment and
management recorded an impairment of goodwill of $117,608 in the
quarter ended October 31, 2002.
New Accounting Pronouncements
See the discussion in notes 6 and 7 to the consolidated financial statements,
which discussion is incorporated herein by reference.
Results of Operations
Three months and nine months ended October 31, 2002 compared to the three months
and nine months ended October 31, 2001.
Page 16
Revenues
Rental revenue and product sales for the three months and nine months ended
October 31, 2002 totaled $1.9 million and $6.4 million compared to $2.1 million
and $7.7 million for the three and nine months ended October 31, 2001. Revenue
decreased by $0.2 million or 10% and $1.3 million or 17% for the three months
and nine months ended October 31, 2002 as compared to the corresponding periods
of the previous year. The decrease in revenues was primarily attributable to the
reduced number of stores operating during the three and nine month periods
ending October 31, 2002 as compared to the prior year periods. During the three
and nine months ended October 31, 2002, the Company was operating 21 stores
compared to 25 stores during most of the fiscal period ended October 31, 2001.
The Company had no management fee income in either the three months or nine
months ended October 31, 2002 compared to no management fee income for the three
months and $7,000 for the nine months ended October 31, 2001, related to the
"Management Agreement" entered into with West Coast Entertainment Corporation on
March 3, 2000 and terminated on February 13, 2001.
Store Operating Expenses
Store operating expenses for the three months and nine months ended October 31,
2002 totaled $1.4 million and $4.2 million, as compared to $1.4 million and
$4.7 million for the three months and nine months ended October 31, 2001. Store
operating expenses were unchanged for the three months and decreased
$0.5 million or 11% for the nine months ended October 31, 2002 as compared to
the corresponding periods of the previous year. The decrease in store operating
expenses was primarily attributable to the reduced number of stores operating
during the three and nine month periods ending October 31, 2002 as compared to
the prior year periods. During the three and nine months ended October 31, 2002,
the Company was operating 21 stores compared to 25 stores during most of the
fiscal year ended October 31, 2001. Store operating expenses as a percentage of
rental revenues and product sales were 72% and 66% for the three months and nine
months ended October 31, 2002 compared to 65% and 61% for the corresponding
periods of 2001 and increased as a percentage of product sales due to the
closure of stores and resulting loss of revenues.
Amortization of Rental library
Amortization of rental library for the three months and nine months ended
October 31, 2002 totaled $0.5 million and $1.4 million, compared to $0.8 million
and $2.5 million for the three months and nine months ended October 31, 2001.
Amortization decreased by $0.3 million or 38% and $1.1 million or 44% for the
three months and nine
Page 17
months ended October 31, 2002 as compared to the corresponding periods of the
previous year. The decrease in amortization was primarily due to the reduced
number of stores operating during the three and nine month periods ending
October 31, 2002 as compared to the prior year periods. In addition, the rental
library inventory has been reduced from the prior year due to the sale of excess
non active rental inventory and the reduction in pricing of VHS tapes by
selected studios. Amortization of rental library inventory as a percentage of
rental revenues and product sales were 24% and 21% for the three months and nine
months ended October 31, 2002 compared to 37% and 33% for the corresponding
period, of 2001.
Cost of Product Sales
Cost of product sales for the three months and nine months ended October 31,
2002 totaled $0.5 million and $1.1 million, compared to $0.2 million and
$0.9 million for the three months and nine months ended October 31, 2001. Cost
of product sales increased $0.3 million or 150% and $0.2 million or 23% for the
three months and nine months ended October 31, 2002 as compared to the
corresponding periods of the previous year. Cost of product sales as a
percentage of rental revenues and product sales, was 24% and 18% for the three
months and nine months ended October 31, 2002, compared to 9% and 13% for the
same period of 2001. The increase was primarily due to increased marketing
promotions during the months of August and September 2002, which increased the
cost of sales for the three months ended October 31, 2002 compared to the prior
year.
Cost of Leased Product
The Company had no leased product for the three and nine months ended
October 31, 2002 compared to $0 and $37,712 for the three months and nine months
ended October 31, 2001. The Company terminated leasing product under studio
revenue sharing agreements beginning August 24, 2000 due the Chapter 11
Bankruptcy filing. The leased product reported for the prior year represented
residual payments due to the studios subsequent to the Bankruptcy filing.
General and Administrative Expenses
General and administrative expenses for the three months and nine months ended
October 31, 2002 totaled $0.7 million and $1.8 million, compared to $0.8 million
and $2.3 million for the three months and nine months ended October 31, 2001.
General and administrative expenses decreased $0.1 million or 13% and
$0.5 million or 22% for the nine months ended October 31, 2002 as compared to
the corresponding periods of the previous year. The
Page 18
decrease in general and administrative expenses was primarily attributable to a
reduction in employee salaries, professional fees, utilities and travel and
entertainment expense, partially offset by increased insurance expense. General
and administrative expense as a percentage of total revenues were 19% and 16%
for the three months and nine months ended October 31, 2002, compared to 22% and
18% for the same period in 2001.
Impairment of Goodwill
Impairment of goodwill for the three and nine months ended October 31, 2002
totaled $117,608. The impairment of goodwill expense represents the write down
of goodwill to it's realizable value based on the estimated undiscounted cash
flows of the remaining stores compared to the actual carrying value of the
remaining store assets and goodwill. There was no impairment of goodwill expense
in the prior periods.
Interest Expense
Interest Expense for the three months and nine months ended October 31, 2002
totaled $156,367 and $244,842, compared to $0 and $12,500 for the three and nine
months ended October 31, 2001. The increase in interest expense is primarily
attributable to the payment of interest on lease cure payment arrangements and
interest payments on priority tax payments payable in terms of the Plan of
Reorganization. In addition, the company began paying interest related to the
Notes Payable issued in connection with the Private Placement that were executed
on May 22, 2002, which included 10% interest on the Notes Payable balance as
well as the amoritization of the discount attached to the warrants granted with
the notes payable and the beneficial conversion. The $12,500 interest expense
for the nine months ended October 31, 2001 was interest charged on the balance
of the $500,000 payable to Fleet Retail Finance on June 29, 2001, per the ("the
Fleet Compromise") agreement, which was approved by the Bankruptcy Court on
March 28, 2001.
Other (income) expense
The Company had no other income or expense for the three months and nine months
ended October 31, 2002, compared to $74,107 of other expense and $184,003 of
other income for the corresponding periods of the previous year. Other income
and expense of the previous year consisted of miscellaneous expense and
miscellaneous income from vendor royalty payments and collection of previous
period late fees.
Page 19
Income Taxes
Statement of Financial Accounting Standards No. 109 requires a valuation
allowance to be recorded when it is more likely than not that some or all of the
deferred tax assets of a Company will not be realized. Accordingly, a full
valuation allowance has been established against the deferred tax asset at
October 31, 2001.
Reorganization Items
The Company had no reorganization expense for the three months and nine months
ended October 31, 2002, compared to $0 and $440,902 for the three and nine
months ended October 31, 2001. The prior period expenses consisted of
professional fees, corporate relocation expenses and a gain on the sale of
assets directly related the Company's Chapter 11 reorganization plan.
Loss (Gain) on Discontinued Operations
The Company reported a loss on discontinued operations of $151,300 for the three
months and a gain of $60,626 on discontinued operations for the nine months
ended October 31, 2002, compared to $171,638 loss and $60,800 gain for the
comparative periods ending October 31, 2001. The Company completed the
disposition of 19 retail video stores to Movie Gallery on November 6, 2002. The
sale of the stores has been accounted for as "Discontinued Operations" in
accordance with Statement of Financial Accounting Standards No. 144.
Extraordinary Item
The Company reported an extraordinary gain of $0 and $536,011 for the three
months and nine months ended October 31, 2002, compared to $0 and $8,951,429 for
the corresponding periods of the previous year. During the nine months ended
October 31, 2002 the Company recorded an extraordinary gain relating to the
withdrawal of priority tax claims from various taxing authorities. During the
nine months ended October 31, 2001 the Company recorded a gain on troubled debt
restructuring of $8,951,429 relating to the loan agreement with Fleet Retail
Finance.
Liquidity and Capital Resource
The Company funds its short-term working capital needs, including the purchase
of videocassettes, DVD's and other inventory, primarily through cash from
operations. The Company expects that cash from operations will be
Page 20
sufficient to fund future videocassette, DVD and other inventory purchases and
other working capital needs for its existing stores.
Videocassette and DVD rental inventories are accounted for as noncurrent assets
under accounting principles generally accepted in the United States of America
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 and DVD 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 and DVD
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,
2003.
In June of 2001, the Company also entered into a purchase money security
agreement directly with Warner Brothers Home Video. The agreement provides the
company with a line of trade credit and 60 day terms for repayment. The Company
purchases all Warner Brothers product directly from Warner Brothers Home Video,
which is then distributed to all Video City's home entertainment retail chain
through a third party distributor.
In July 2001 the Company entered into an agreement with Video Products
Distributors ("VPD") under which VPD agreed to become the exclusive video
distributor for all of Video City's home entertainment retail chain. VPD will
provide all videocassettes, DVDs and accessories for rental and sale with the
exception of Warner Brothers Home Video product in all locations. As part of
this agreement, Video City is receiving a line of trade credit and 90 day terms
for repayment to VPD.
On July 30, 2001, the Bankruptcy Court entered an Order confirming Video City's
First Amended Chapter 11 Plan of Reorganization (the "Plan"). The Plan became
effective on August 29, 2001. Various pre-petition liabilities are still in
dispute and as a result are still classified as "Liabilities subject to
compromise".
Page 21
Inherent in a successful plan of reorganization is a capital structure which
permits the Company to generate sufficient cash flow after reorganization to
meet its restructured obligations and fund the current obligations of the
reorganized Company. Under the Bankruptcy Code, the rights of and ultimate
payment to pre-petition creditors may be subsequently altered and, as to some
classes, eliminated. The Company believes that the sources of capital available
to the Company and internally generated funds will be adequate to meet the
Company's anticipated needs through fiscal 2003; however, no assurance can be
given with respect to the Company's liquidity.
On May 10, 2002 the Company initiated a Private Placement Offering to accredited
investors. The Private Placement Offering was to purchase Series A Units with
each unit consisting of a $10,000 10% Senior Subordinated Convertible Note due
November 1, 2003 and a Series A Warrant to purchase 20,000 shares of common
stock. The Company is offering a minimum of 50 units and a maximum of 100 units.
The units, convertible notes, warrants and underlying common stock have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or with any securities regulatory authority of any jurisdiction. As of July 31,
2002 the Company has closed the first round with 74 units sold. The aggregate
principal amount of the convertible notes is $742,420 at an interest rate of 10%
per annum. Principal on these convertible notes shall be payable in one
installment plus accrued but unpaid interest on November 1, 2003. Interest shall
be payable semi-annually in arrears on the first day of November and May of each
year, commencing November 1, 2002. The convertible notes shall be convertible at
the election of the payee to common stock of the Company at a conversion price
of $1.00 per share. The market price of the stock and the relative fair value of
the convertible notes in relation to the conversion price of these convertible
debentures created a beneficial conversion amount of $66,818, and is recorded as
a note discount that is amortized over the life of the convertible notes.
In connection with issuance of the convertible notes, the Company issued
one-year warrants to purchase 1,484,840 shares of the Company's common stock at
an exercise price of $0.01 per share. The Company recorded the fair value of the
warrants issued of $400,907 using the Black-Scholes model, as a note discount
and is being amortized over the life of the notes as interest expense.
The Company sold an additional 14 Series A Units for an aggregate amount of
$140,000 and issued an additional one-year warrants to purchase 280,000 shares
of the Company's common stock at an exercise price of $0.01 per
Page 22
share during the quarter ended October 31, 2002. The aggregate principal amount
of all outstanding convertible notes is $882,420 at an interest rate of 10% per
annum as of the quarter ended October 31, 2002.
On November 6, 2002, in conjunction with the sale of the 19 stores to Movie
Gallery the Company presented to holders of Series A units in the Private
Placement an option to be paid in full on the balance of their Series A Units
including interest due or to roll up to 65% of their investment back into the
Private Placement. In consideration the Company offered each Series A unit
holder an additional warrant for each dollar rolled over into the Private
Placement. The conditions and terms would remain the same as the initial terms
of the Private Placement Offering. The total principal of convertible notes
remaining outstanding after the completion of the rollover was $387,752.
The Company is seeking to improve its working capital position by seeking
increased trade credit, extended terms from its vendors and continuing to seek
additional investments through the private placement offering. However, no
assurance can be given that the Company will be successful in its efforts to
obtain additional short-term capital to improve its working capital position.
Cash Flows
Nine months Ended October 31, 2002 Compared to the Nine months Ended
Octobery 31, 2001
Cash Provided by Operating Activities
Net cash provided by operating activities for the nine months ended October 31,
2002, decreased by approximately $4.0 million or 88%, compared to the nine
months ended October 31, 2001. The decrease was caused primarily by the decrease
in net income of $37.0 million over the comparable prior year period, offset by
the non-cash gain of $8.9 million and $32.8 million recorded as a result of the
forgiveness of debt by Fleet and discharge of liabilities subject to compromise
related to the bankruptcy plan of reorganization. The decrease was also
attributable to a decrease in depreciation and amortization as a result of the
reduction of 4 stores in the second quarter of fiscal 2001. In addition, the
decrease was also due to a decrease in other receivables and accounts payable
and liabilities subject to compromise as a result of the reclassification of the
store assets associated with the discontinued operations as being held for sale
and separately disclosed in the statement of cash flows as "Cash Flows from
Discontinued Operations".
Page 23
Cash Flow from Discontinued Operations
Cash flow from discontinued operations was $1.6 million, which represented the
cash flows from the 19 video retail stores sold to M.G. Midwest, Inc. on
November 6, 2002 and the change in the net assets as a result of the
reclassification of these assets as being held for sale in accordance with
Statements of Financial Accounting Standards No. 144.
Cash Used in Investing Activities
Net cash used in investing activities during the nine months ended October 31,
2002 decreased by approximately $1.4 million or 35%, compared to the nine months
ended October 31, 2001. The change was mainly attributable to the decrease in
the purchase of videocassettes for the rental library due to the Company having
less stores, during the nine months ended October 31, 2002 and due to the
reclassification of the rental inventory of the 19 stores sold to "Assets Held
for Sale".
Cash Provided by (Used in) Financing Activities
Net cash provided by (used) in financing activities during the nine months ended
October 31, 2002, increased by approximately $1.9 million or 130%, compared to
the nine months ended October 31, 2001. The change was mainly attributable to
the receipt of the proceeds from the private placement and the fact there was no
repayment of borrowing under the credit facility for the nine month period ended
October 31, 2002.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company's market risk sensitive instruments do not subject it to material
market risk exposures, except for such risks related to interest rate
fluctuations. The Company discontinued recording interest expense on unsecured
and partially secured pre-petition debt subject to compromise.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: Our Chief Executive Officer
and Chief Financial Officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 (c)
and 15d-14 (c) within the 90-day period prior to filing of this report, have
concluded that the
Page 24
Company's discloser controls and procedures were effective to ensure that
material information relating to us, including our consolidated subsidiaries,
would be made known to them by others within those entities, particularly during
the period in which this Form 10-Q was being prepared.
Changes in Internal Controls: There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to their evaluation referenced to above.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On September 20, 2002, we sold nine Series A Units for an aggregate amount of
$90,000 to a corporation, which included the issuance of $90,000 10% Senior
Subordinated Convertible Notes due November 1, 2003, and warrants to purchase
180,000 shares of our common stock at an exercise price of $0.01 per share. The
warrants hold registration rights for the underlying shares of the Company's
common stock.
On October 1, 2002, we sold Five Series A Units for an aggregate amount of
$50,000 to two individuals and a corporation, which included the issuance of
$50,000 10% Senior Subordinated Convertible Notes due November 1, 2003, and
warrants to purchase 100,000, shares of our common stock at an exercise price of
$0.01 per share. (See note 3 to the Consolidated Financial Statements for
further information relating to the Series A Units which information is
incorporated herein by reference.)
The issuance of the above Series A Units, convertible notes and warrants were
made in reliance upon the private placement exemption provided by Section 4 (2)
of the Securities Act of 1933 as a transaction not involving a public offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Report on Form 8-K dated November 22, 2002, reporting the Company's
announcement of its sale of 19 stores located outside California to
Movie Gallery.
Page 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Video City, Inc
---------------
(Registrant)
December 23, 2002 /S/ Timothy L. Ford
-------------------
Timothy L. Ford
Chief Executive Officer
(Principal Executive Officer)
December 23, 2002
/S/ Rudolph R. Patino
---------------------
Rudolph R. Patino
Chief Financial Officer
(Principal Financial Officer)
Page 26
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Timothy L Ford, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Video City, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
VIDEO CITY, INC.
/S/ Timothy L. Ford
-----------------------
Chief Executive Officer
DATED: December 23, 2002
Page 27
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Rudolph R. Patino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Video City, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
VIDEO CITY, INC.
/S/ Rudolph R. Patino
-----------------------
Chief Financial Officer
DATED: December 23, 2002
Page 28