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United States

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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Form 10-QSB



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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 April 30, 2003



| ̈ |  | 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 small business issuer as specified in its charter)



|Delaware                                                       |  | 95-3897052                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (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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Issuers telephone number, including area code:  (661) 634-9171



Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13, or 15 (d) of the Securities Exchange Act of 1934 after the distribution of securities under a plan confirmed by a court.  Yes  NoX



State the number of shares outstanding of each of the issuers classes of common equity as of the latest practicable date.



The number of shares of Common Stock outstanding as of June 19, 2003 was 10,102,720



Transitional Small Business Disclosure Format (Circle One):  
Yes  NoX



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Ta
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10-QSB



|PART I                    |  | 3 
|------------------------- |  | --
|Item 1                    |  | 3 
|Balance Sheet Assets      |  | 3 
|Balance Sheet Liabilities |  | 4 
|Statement of Operations   |  | 5 
|Cash Flow Statement       |  | 6 
|Table 5                   |  | 9 
|Table 6                   |  | 11
|Item 2                    |  | 12
|PART II                   |  | 22
|Item 2                    |  | 22
|Item 5                    |  | 22
|Item 6                    |  | 23



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PART I. FINANCIAL INFORMATION





Item 1. Financial Statements



VIDEO CITY, INC.

CONSOLIDATED BALANCE SHEETS



|                               |  | April 30, 2003 |           | January 31, 2003
|------------------------------ |  | -------------- | --------- | ----------------
|                               |  | (Unaudited)    |           | (Audited)       
|ASSETS                         |  |                |           |                 
|Current assets:                |  |                |           |                 
|Customer receivables           |  | $              | 70,328    |                 
|Merchandise inventory.         |  |                | 147,521   |                 
|Receivable from sale of stores |  |                | 74,000    |                 
|Other                          |  |                | 107,563   |                 
|                               |  |                |           |                 
|Total current assets           |  |                | 399,412   |                 
|                               |  |               
|Rental library, net            |  |                | 961,265   |                 
|Property and equipment, net    |  |                | 405,425   |                 
|Goodwill                       |  |                | 1,008,429 |                 
|Other assets                   |  |                | 273,472   |                 
|                               |  |                |           |                 
|Total assets                   |  | $              | 3,048,003 |                 
|                               |  |                |           |                 



See accompanying notes
to consolidated financial statements



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VIDEO CITY, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                |  | April 30, 2003 |             |   | January 31, 2003 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ---------------- | -
|                                                                                                                                                                                                |  | (Unaudited)    |             |   | (Audited)        |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                                            |  |                |             |   |                  |  
|Liabilities not subject to compromise:                                                                                                                                                          |  |                |             |   |                  |  
|Current liabilities:                                                                                                                                                                            |  |                |             |   |                  |  
|Bank overdraft                                                                                                                                                                                  |  | $              | 46,382      |   |                  | $
|Accounts payable                                                                                                                                                                                |  |                | 1,514,904   |   |                  |  
|Accrued Expenses                                                                                                                                                                                |  |                | 1,124,838   |   |                  |  
|Note payable                                                                                                                                                                                    |  |                | 40,072      |   |                  |  
|Senior subordinated convertible notes payable (net of unamortized discount of $151,378)                                                                                                         |  |                | 514,874     |   |                  |  
|Current portion of tax liability                                                                                                                                                                |  |                | 185,386     |   |                  |  
|Other liabilities                                                                                                                                                                               |  |                | 96,399      |   |                  |  
|                                                                                                                                                                                                |  |                |             |   |                  |  
|Total current liabilities                                                                                                                                                                       |  |                | 3,522,855   |   |                  |  
|Shares issuable under plan of reorganization                                                                                                                                                    |  |                | 215,894     |   |                  |  
|Deferred tax liability                                                                                                                                                                          |  |                | 136,000     |   |                  |  
|Tax liability less current portion                                                                                                                                                              |  |                | 434,765     |   |                  |  
|                                                                                                                                                                                                |  |                |             |   |                  |  
|Total liabilities not subject to compromise                                                                                                                                                     |  |                | 4,309,514   |   |                  |  
|                                                                                                                                                                                                |  |                |             |   |                  |  
|                                                                                                                                                                                                |  |               
|Liabilities subject to compromise                                                                                                                                                               |  |                |             |   |                  |  
|Accounts payable                                                                                                                                                                                |  |                | 182,907     |   |                  |  
|                                                                                                                                                                                                |  |                |             |   |                  |  
|Total Liabilities Subject to Compromise                                                                                                                                                         |  |                | 182,907     |   |                  |  
|                                                                                                                                                                                                |  |                |             |   |                  |  
|Total Liabilities                                                                                                                                                                               |  |                | 4,491,611   |   |                  |  
|                                                                                                                                                                                                |  |               
|STOCKHOLDERS DEFICIT :                                                                                                                                                                         |  |                |             |   |                  |  
|Common stock, $.01 par value per share, 30,000,000 shares authorized; 6,299,798 shares issued and outstanding at April 30,
2003 and 6,299,798 shares issued and outstanding at January 31, 2003 |  |                | 62,998      |   |                  |  
|Additional paid-in capital                                                                                                                                                                      |  |                | 21,770,156  |   |                  |  
|Accumulated deficit                                                                                                                                                                             |  |                | (23,276,762 | ) |                  |  
|                                                                                                                                                                                                |  |                |             |   |                  |  
|Total stockholders deficit                                                                                                                                                                     |  |                | (1,443,608  | ) |                  |  
|                                                                                                                                                                                                |  |                |             |   |                  |  
|Total liabilities and stockholders deficit                                                                                                                                                     |  | $              | 3,048,003   |   |                  | $
|                                                                                                                                                                                                |  |                |             |   |                  |  



See accompanying notes
to consolidated financial statements



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VIDEO CITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                     |  | Three Months Ended |          
|-------------------------------------------------------------------- |  | ------------------ | ---------
|                                                                     |  | April 30,2003      |          
|REVENUES:                                                            |  |                    |          
|Rental revenues and product sales                                    |  | $                  | 1,844,436
|                                                                     |  |                    |          
|TOTAL REVENUES                                                       |  |                    | 1,844,436
|                                                                     |  |                    |          
|OPERATING COSTS AND EXPENSES:                                        |  |                    |          
|Store operating expenses                                             |  |                    | 1,101,481
|Amortization of rental library                                       |  |                    | 394,602  
|Cost of product sales                                                |  |                    | 205,407  
|Closed store expense                                                 |  |                    | 88,882   
|General and administrative expenses                                  |  |                    | 464,058  
|                                                                     |  |                    |          
|TOTAL OPERATING COSTS AND EXPENSES                                   |  |                    | 2,254,430
|Loss from operations                                                 |  |                    | (409,994 
|Other (Income) expense                                               |  |                    |          
|Interest expense, net                                                |  |                    | 100,553  
|                                                                     |  |                    |          
|Net loss from continuing operations                                  |  | $                  | (510,547 
|                                                                     |  |                    |          
|Discontinued operations:                                             |  |                    |          
|Loss (Gain) on discontinued operations                               |  |                    |         
|Net Income (loss)                                                    |  |                    | (510,547 
|Loss per common share data:                                          |  |                    |          
|Basic and diluted loss per common share from continuing operations   |  | $                  | (0.08    
|Basic and diluted gain per common share from discontinued operations |  |                    |         
|Basic and diluted loss per common share                              |  |                    | (0.08    
|Weighted average number of common shares outstanding                 |  |                    |          
|Basic and Diluted                                                    |  |                    | 6,299,798



See accompanying notes
to consolidated financial statements



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VIDEO CITY, INC.



CONSOLIDATED
STATEMENTS OF CASH FLOWS



(Unaudited)



|                                                                                          |  | Three Months Ended |         
|----------------------------------------------------------------------------------------- |  | ------------------ | --------
|                                                                                          |  | April 30,2003      |         
|Increase (Decrease) in cash Cash flows from operating activities:                         |  |                    |         
|Net Loss from continuing operations                                                       |  | $                  | (510,547
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                    |         
|                                                                                          |  |                   
|Depreciation and amortization                                                             |  |                    | 487,174 
|Amortization of discount on senior subordinated convertible notes payable                 |  |                    | 60,000  
|Changes in assets and liabilities, net of effects of acquisitions:                        |  |                    |         
|Customer receivables                                                                      |  |                    | 26,085  
|Other receivables                                                                         |  |                    |        
|Merchandise inventories                                                                   |  |                    | 27,614  
|Other assets                                                                              |  |                    | 623     
|Accounts payable and liabilities subject to compromise                                    |  |                    | 160,275 
|                                                                                          |  |                    |         
|Cash from discontinued operations                                                         |  |                    |        
|Net cash provided by operating activities                                                 |  |                    | 251,224 
|                                                                                          |  |                    |         
|Cash flows from investing activities:                                                     |  |                    |         
|Purchases of videocassette rental library,                                                |  |                    | (393,235
|Purchases of fixed assets                                                                 |  |                    | 1,942   
|                                                                                          |  |                    |         
|Net cash (used in) investing activities                                                   |  |                    | (395,177
|                                                                                          |  |                    |         
|Cash flows from financing activities:                                                     |  |                    |         
|Increase in bank overdraft                                                                |  |                    | (36,247 
|Proceeds from repayment of notes payable                                                  |  |                    | (4,800  
|Proceeds from issuance of common stock                                                    |  |                    |        
|Proceeds from senior subordinated convertible notes payable                               |  |                    | 185,000 
|                                                                                          |  |                    |         
|Net cash provided by (used in) financing activities                                       |  |                    | 143,953 
|                                                                                          |  |                    |         
|Net increase (decrease) in cash                                                           |  |                    |        
|Cash at beginning of period                                                               |  |                    |        
|                                                                                          |  |                    |         
|Cash at end of period                                                                     |  | $                  |        
|                                                                                          |  |                    |         



See accompanying notes
to consolidated financial statements



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VIDEO CITY, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



(Unaudited)



|                                                                                                              |  | Three Months Ended
|------------------------------------------------------------------------------------------------------------- |  | ------------------
|                                                                                                              |  | April 30,2003     
|Supplementary disclosures of cash flow information Cash Paid For:                                             |  |                   
|Interest                                                                                                      |  | $                 
|Non-cash investing and financing activities:                                                                  |  |                   
|Value of warrants related to issuance of senior subordinated Convertible notes payable                        |  | $                 
|Par Value of common stock issued according to the plan of Reorganization                                      |  | $                 
|Excess of value of common stock over par value of common stock Issued according to the plan of reorganization |  | $                 



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., 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 subsidiaries have been inactive since emerging from bankruptcy.



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, 2003, the results of operations for the three months ended April 30, 2003 and 2002, and cash flows for the three months ended April 30, 2003 and 2002. 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, 2003.



The accompanying consolidated balance sheets as of January 31, 2003 and April 30, 2003 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.



2. 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. 1,813,000 common stock options and warrants were not included in the computations of diluted earnings per share for the three months ended April 30, 2002 because the effect of exercise and/or conversion would have an antidilutive effect
on earnings per share. 973,336 common stock options were not included in the computations of diluted earnings per share for the three months ended April 30, 2003 because the effect of exercise and/or conversion would have an antidilutive effect on
earnings per share.



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3. Accounting for Stock Options



The Company has adopted the intrinsic value method of accounting for employee stock options under the principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and discloses the pro forma effect on net income (loss) and income (loss) per share as if the fair value based method had been applied. For equity instruments, including
stock options, issued to non-employees, the fair value of the equity instruments or the fair value of the consideration received, whichever is more readily determinable, is used to determine the value of services or goods received and the
corresponding charge to operations.



The following table
illustrates the effect on net income (loss) and income (loss) per share as if the Company had applied the fair value recognition provision of SFAS No. 123 to stock-based employee compensation.



|                                                                                                       |  | Three Months Ended April 30, 2003 |          |   | Three Months Ended April 30, 2002 |  
|------------------------------------------------------------------------------------------------------ |  | --------------------------------- | -------- | - | --------------------------------- | -
|Net income (loss): as reported                                                                         |  | $                                 | (510,547 | ) |                                   | $
|Add: total stock based employee compensation expense determined under fair value method for all awards |  |                                   | (8,613   | ) |                                   |  
|                                                                                                       |  |                                   |          |   |                                   |  
|Pro forma net income (loss)                                                                            |  | $                                 | (519,160 | ) |                                   | $
|                                                                                                       |  |                                   |          |   |                                   |  
|Income (loss) per sharebasic and diluted:                                                             |  |                                   |          |   |                                   |  
|As reported                                                                                            |  | $                                 | (0.08    | ) |                                   | $
|Pro forma                                                                                              |  | $                                 | (0.08    | ) |                                   | $
|                                                                                                       |  |                                   |          |   |                                   |  



As required by SFAS
123, the Company provides the following disclosure of estimated values for these awards. The weighted-average grant-date fair value of options granted during, 2003 and 2002 was estimated to be $0.25 and $0.24, respectively.





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The fair value of each option grant during the three months ended April 30, 2002 was estimated on the
date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions for 2002 risk free interest rates of 4.5%, expected lives of 1 to 5 years; volatility of 50% and no assumed dividends. There were no options
granted in the three months ended April 30, 2003.



4. Use of Estimates



The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ
materially from those estimates.



5. Litigation



The Company is involved in various legal and administrative proceedings in
its normal course of business. Management believes the ultimate disposition of these matters will not have a material adverse effect on the Companys financial position, results of operations or cash flows.



6. Senior Subordinated Convertible Notes Payable



The Company issued an additional 18 Series A Units for cash proceeds of
$185,000 and issued one year warrants to purchase shares of the Companys common stock at an exercise price of $0.01 per share during the quarter ended April 30, 2003.



In connection with issuance of the Notes, the Company issued one-year warrants to purchase 370,000 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 $30,910 using the Black-Scholes model, as a note discount, and is being amortized over the life of the notes as
interest expense.



7. Discontinued Operations



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On October 24, 2002 the Board of Directors approved the disposition of 19 retail video stores (the
19 Stores) to M.G. Midwest, Inc., a Delaware corporation (Movie Gallery). The 19 Stores represented 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 as of November 2002.



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 and $40,000 on June 17, 2003.
The balance of $10,000 will not be paid based on the uncertainties whether one of the 79 sold stores will achieve certain levels of gross revenue for the six months ending August 31, 2003.



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 April 30, |          
|                                       |  | 2002                         |          
|REVENUES:                              |  |                              |          
|Rental revenues and product sales      |  | $                            | 1,693,948
|TOTAL REVENUES                         |  |                              | 1,693,948
|OPERATING COSTS AND EXPENSES:          |  |                              |          
|Store operating expenses               |  |                              | 999,429  
|Amortization of rental library         |  |                              | 453,566  
|Cost of product sales                  |  |                              | 152,455  
|Cost of leased product                 |  |                              |         
|TOTAL OPERATING COSTS AND EXPENSES     |  |                              | 1,605,450
|                                       |  |                              |          
|Loss (Gain) on discontinued operations |  | $                            | (88,498  



No general corporate
overhead and interest expense has been allocated to these 19 stores.





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8. Subsequent Events



The Company has entered into a definitive agreement to sell 12 of its retail video stores, which constitute all of its remaining stores, except for two
stores located in Ventura, California, to Movie Gallery. Such sale would be subject to a number of contingencies including, without limitation, the satisfactory completion of financial and real estate due diligence, successful assignment of store
leases to be assumed by Movie Gallery, the approval of the Companys shareholders, and the Companys satisfaction of any other approvals and regulatory requirements. There can be no assurances that such a transaction with Movie Gallery
will be completed. The Company closed an additional unprofitable store in June 2003. The Company may also sell the two stores located in Ventura California, depending on whether the Company is able to negotiate an attractive purchase price for such
two stores from any purchaser.



The Company is currently
exploring all possibilities regarding future plans for its business and continued existence in the event of the sale of substantially all of its assets. The Company is uncertain whether its business will continue to be in the retail video industry
or in any specific industry related to the retail video industry. In any case, the Company plans to reduce its work force and expenses to a minimum level in the event of such sale.



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995



This quarterly report contains forward-looking statements within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, such as statements of the Companys plans, activities, expectations and intentions, that involve risks and uncertainties that could cause actual results to differ materially from those
discussed in such forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to: the Companys liquidity and financial condition; the Companys liabilities and potential contingent
liabilities of the Company; the ability to complete certain anticipated transactions



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including the satisfaction of certain contingencies necessary for such completion; the ability to obtain assignments of
store leases to be assumed by the acquirer; the approval of the sale by the Companys shareholders; availability of financing and capital resources; the performance and operations of the Companys retail video stores; the demand for video
tapes, both rental and sales, which may be affected by seasonal factors, weather, and the level of home viewing; competition from other retailers; the Companys ability to manage its operations and financial obligations; and other factors
discussed herein and in the Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2003.



Estimates and Critical Accounting Policies



Estimates and Critical Accounting Policies Estimates 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. 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:



| |  |  | The amortization method 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Customer receivable balances are evaluated on a continual basis and allowances are provided for 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Goodwill represents the excess of the cost of the companies acquired over the fair value of their net assets at the dates of acquisition and is amortized on the straight-line method
over 20 years. 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
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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flows on an undiscounted basis. In managements opinion, no material impairment exists at April 30, 2003.



Results of Operations



Three months ended April 30, 2003 compared to the three months ended April 30, 2002.



The statements of operations have been restated to show the net effect of the
discontinuance of the 19 stores sold in November 2002.



Revenues



Rental revenue and product sales for the three months
ended April 30, 2003 totaled $1,844,000 compared to $2,238,000 for the three months ended April 30, 2002. Revenue decreased by $394,000 or 17.6% for the three months ended April 30, 2003 as compared to the three months ended April 30, 2002. The
decrease in revenues was primarily attributable to the closure of 4 stores during the fourth quarter of fiscal 2003. The average revenue per store remained fairly consistent between the two periods. Revenues per store during the fiscal quarter ended
2003 were up slightly over the prior quarter ended April 30, 2002, primarily due to the winter Olympics being broadcast during the first quarter of 2002 and a less-than-optimal release schedule from the Hollywood studios.



Store Operating Expenses



Store operating expenses for the three months ended April 30, 2003 totaled
$1,101,000 compared to $1,392,000 for the three months ended April 30, 2002. Store operating expenses decreased by $291,000 or 20.9% for the three months ended April 30, 2003 as compared to the corresponding period of the previous year. The
decreased store expenses were primarily attributable to the closure of 4 stores during the fourth quarter of fiscal 2003. In addition, the remaining stores were more profitable at the store level due to lower lease and payroll expenses as a
percentage of revenues. Store operating expenses as a percentage of rental revenues and product sales were 59% for the three months ended April 30, 2003 compared to 62% for the corresponding period of 2002.



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Amortization of Rental Library



Amortization of rental inventory for the three months ended April 30, 2003 totaled $395,000 compared to $482,000 for the
three months ended April 30, 2002. Amortization expense decreased by $87,000 or 18.0% for the three months ended April 30, 2003 as compared to the corresponding period of the previous year. The decreased amortization expense was primarily
attributable to the closure of 4 stores during the fourth quarter of fiscal 2003. Amortization of rental inventory as a percentage of rental revenue and product sales were 21.4% for the three months ended April 30, 2003 compared to 21.5% for the
corresponding period of 2002. The amortization expense remained relatively consistent between the two periods.



Cost of Product Sales



Cost of product sales for the three months ended April 30, 2003 totaled $205,000, compared to $ 252,000 for the three months ended April 30, 2002. Cost of product sales decreased by $47,000 or 18.7% for the three months ended April 30, 2003
as compared to the corresponding period of the previous year. The decrease in cost of product sales was primarily attributable to the sale and closure of 4 stores during the fourth quarter of fiscal 2003. The cost of product sales remained fairly
consistent as a percentage of revenues due to the Companys margins on previously viewed tapes sales and sell-through have remained at the same levels, from this fiscal year to last fiscal year. Cost of product sales as a percentage of rental
revenues and product sales, was 11% for the three months ended April 30, 2003, compared to 11% for the corresponding period of 2002.



Closed Store Expense



Close store expense for the three months ended April 30, 2003 was $89,000 and represents the estimated lease liability expense for the four stores closed
during the fourth quarter of 2003. There was no closed store expense for the prior period ended April 30, 2002.



General and Administrative Expenses



General and administrative expenses for the three months ended April 30, 2003 totaled $464,000 compared to $597,000 for the three months ended April 30,
2002. General and administrative expenses decreased by $133,000



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or 22.3% for the three months ended April 30, 2003 as compared to the corresponding period of the previous year. The
decrease in general and administrative expenses was primarily attributable to the companys reduction in employee salaries, travel and entertainment expenses, insurance and professional fees. General and Administrative expenses as a percentage
of rental revenues and product sales, was 25% for the three months ended April 30, 2003 compared to 27% for the corresponding period of 2002.



Interest Expense



The Company incurred net interest expense of $100,553 for the three months ended April 30, 2003 compared to $11,700 for the three months ended April 30,
2002. The increase in interest expense is primarily related to the interest expense related to the Private Placement Offering, which records the amortization of the discount related to the attached warrants and normal interest expense charged on the
promissory notes. In addition, the Company is paying 8% interest on the priority sales taxes that are currently being paid over a five year period as per the Bankruptcy Plan of Reorganization.



Discontinued Operations



The Company recorded a gain on discontinued operations of $88,498 which represents the operations of the 19 Stores owned by
the Company outside of California, which were sold to Movie Gallery on November 6, 2002. The 19 stores are being recorded as discontinued operations for the quarter ended April 30, 2002.



Liquidity and Capital Resources



At April 30, 2003 the Company had stockholders deficit, recurring losses and negative working capital. These conditions raise substantial doubt
about the ability of the Company to continue as a going concern. The consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern. In May 2003, the Company sold two of
its retail video stores to Movie Gallery to raise cash in order to satisfy the Companys immediate need for liquidity. The Company has entered into a definitive agreement to sell 12 of its retail video stores, which constitute all of its
remaining stores, except for two stores located in Ventura, California, to Movie Gallery. Such sale would be subject to a number of contingencies



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including, without limitation, the satisfactory completion of financial and real estate due diligence, successful
assignment of store leases to be assumed by Movie Gallery, the approval of the Companys shareholders, and the Companys satisfaction of any other approvals and regulatory requirements. There can be no assurances that such a transaction
with Movie Gallery will be completed. The Company may also sell the two stores located in Ventura California, depending on whether the Company is able to negotiate an attractive purchase price for such two stores from any purchaser.



The Company is currently exploring all possibilities regarding future plans
for its business and continued existence in the event of the sale of substantially all of its assets. The Company is uncertain whether its business will continue to be in the retail video industry or in any specific industry related to the retail
video industry. In any case, the Company plans to reduce its work force and expenses to a minimum level in the event of such sale.



During the months of November and December of 2002, the Company closed four unprofitable retail stores located in Bakersfield, California. The Company
closed an additional unprofitable store in June 2003. The costs related to the closing during the last fiscal year are shown under store closure costs in the statements of operations. The Company had 17 stores remaining in the State of California as
of April 30, 2003.



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 insufficient to fund future videocassette, DVD and other inventory
purchases and other working capital needs for its existing stores. The Company raised $185,000 in additional funds through the Private Placement offerings to help improve its working capital needs. The Company sold two of its stores located in San
Francisco and Salinas California on May 14, 2003, for a total price of $900,000 to Movie Gallery. The proceeds from the two stores were used to pay down a portion of the senior debt and the balance was used for working capital. As of the closing on
May 14, 2003, there is a balance of $350,000 that is being held back until satisfactory completion of a lease assignment to Movie Gallery.



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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.



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.



Effective in November 2002, with the sale of the 19 stores located outside of California to Movie Gallery, Video Products
Distributors has modified their agreement with Video City by reducing the line of trade credit that it previously was operating with and reducing its terms for repayment from 90 days to 60 days.



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 offered 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



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Securities Act), or with any securities regulatory authority of any jurisdiction. As of July 31, 2002 the Company 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 additional one-year warrants to purchase 280,000 shares of
the Companys common stock at an exercise price of $0.01 per share during 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.



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The Company sold an additional 9 Series A Units for an aggregate amount of $93,500 and issued additional
one-year warrants to purchase 187,000 shares of the Companys common stock at an exercise price of $0.01 per share during the fourth quarter ended January 31, 2003.



The Company sold an additional 18 Series A Units for an aggregate amount of $185,000 and issued additional one year warrants
to purchase 370,000 shares of the Companys common stock at an exercise price of $0.01 per share during the three months ended April 30, 2003. The total principal of senior subordinated convertible notes payable outstanding at April 30, 2003
was $666,252.



On June 23, 2003, the Company completed the
issuance of a Secured Promissory Note to an unaffiliated accredited investor in the principal amount of $460,000. The Secured Promissory Note was sold at a discount of 37.5 percent from the face value of such note due to the financial condition of,
and perceived risks of investing in, the Company. The Secured Promissory Note matures on August 29, 2003 and bears interest at rate of nine percent per annum. The Secured Promissory Note is secured by the assets of the Company. After the discount
from face value and the commission payable to the Companys investment banking firm in connection with such financing, the Company received net proceeds in the amount of $258,150. The Company intends to use such net proceeds to satisfy its
immediate need for liquidity and to pay the costs and expenses in connection with the proposed sale of its 12 stores.



On June 20, 2003, the Company entered into an Asset Purchase Agreement with M.G. Midwest, Inc., an affiliate of Movie Gallery, Inc. (collectively,
Movie Gallery), for the sale of 12 video stores which constitute all of the Companys stores other than the two located in Ventura, California. The purchase price of cash in the aggregate amount of $3,250,000, was determined as a
result of arms length negotiations between the Company and Movie Gallery, and is payable to the Company at the closing of the sale, anticipated to occur on or around August 1, 2003. Such sale would be subject to a number of contingencies
including, without limitation, the approval of the Companys shareholders, Movie Gallerys satisfactory completion of financial and real estate due diligence, and the successful assignments of store leases to be assumed by Movie Gallery.
There can be no assurances that such a transaction with Movie Gallery will be completed.



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The Company closed an additional unprofitable store in June 2003. The Company may also sell the two
stores located in Ventura California, depending on whether the Company is able to negotiate an attractive purchase price for such two stores from any purchaser.



In the event of the sale of substantially all of the assets of the Company, the Company will receive the consideration for such sale and will have no
operating revenue.



The Company is currently exploring all
possibilities regarding future plans for its business and continued existence in the event of the sale of substantially all of its assets. The Company is uncertain whether its business will continue to be in the retail video industry or in any
specific industry related to the retail video industry. In any case, the Company plans to reduce its work force and expenses to a minimum level in the event of such sale.



Cash Flows



Three months Ended April 30, 2003 Compared to the Three months Ended April 30, 2002



Cash Provided by Operating Activities



Net cash provided by operating activities for the three months ended April 30, 2003, increased by $55,000 or 28%, compared to the three months ended April
30, 2002. The increase was primarily due to an increase in accounts payable and liabilities subject to compromise and amortization of discount on senior subordinated convertible notes payable, offset by a reduction in depreciation and amortization.



Cash Flow from Discontinued Operations



Cash flow from discontinued operations was $193,000, 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.



Cash Provided by (Used in) Investing Activities



Net cash (used) in investing activities for the three months ending April 30, 2003, decreased by $168,000 or 29%, compared to the three months ended April
30, 2002. The decrease was primarily due to a reduction in the purchases of videocassettes for the rental library.



Cash Provided by (Used) in Financing Activities



Net cash provided by financing activities for the three months ending April 30, 2003, decreased by $29,000 or 16% , compared to the three months ended
April 30, 2002. The decrease was primarily due to an increase in proceeds from senior subordinated convertible notes payable, offset by a reduction of the bank overdraft compared to the three months ended April 30, 2002.



Item 3. Controls and Procedures



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Within 90 days prior to the filing date of this quarterly report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Exchange Act Rule
13a-14. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures effectively ensure that material information required to be in this quarterly report is made known to
them by others in a timely manner. We have not made any significant changes to our internal controls, and no other factors have come to our attention that could significantly affect our internal controls, subsequent to the date of this most recent
evaluation.



PART II. OTHER INFORMATION



Item 2. Changes in Securities and Use of Proceeds



On June 23, 2003, the Company completed the issuance of a Secured Promissory Note to an unaffiliated accredited investor in the principal amount of $460,000. The Secured Promissory Note was sold at a discount of 37.5
percent from the face value of such note due to the financial condition of, and perceived risks of investing in, the Company. The Secured Promissory Note matures on August 29, 2003 and bears interest at rate of nine percent per annum. The Secured
Promissory Note is secured by the assets of the Company. After the discount from face value and the commission payable to the Companys investment banking firm in connection with such financing, the Company received net proceeds in the amount
of $258,150. The Company intends to use such net proceeds to satisfy its immediate need for liquidity and to pay the costs and expenses in connection with the proposed sale of its 12 stores.



Company believes that the issuance of the Secured Promissory Note 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 5. Other Information



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On June 20, 2003, the Company entered into an Asset Purchase Agreement with M.G. Midwest, Inc., an
affiliate of Movie Gallery, Inc. (collectively, Movie Gallery), for the sale of 12 video stores which constitute all of the Companys stores other than the two located in Ventura, California. The purchase price of cash in the
aggregate amount of $3,250,000, was determined as a result of arms length negotiations between the Company and Movie Gallery, and is payable to the Company at the closing of the sale, anticipated to occur on or around August 1, 2003. Such sale
would be subject to a number of contingencies including, without limitation, the approval of the Companys shareholders, Movie Gallerys satisfactory completion of financial and real estate due diligence, and the successful assignments of
store leases to be assumed by Movie Gallery. There can be no assurances that such a transaction with Movie Gallery will be completed. At all times, there were no material relationships between Movie Gallery or any of its shareholders or affiliates,
on the one hand, and the Company, any of the Companys affiliates, any director or officer of the Company or any associate of any such director or officer, on the other hand.



The Company is currently exploring all possibilities regarding future plans for its business and continued existence in the
event of the sale of substantially all of its assets. The Company is uncertain whether its business will continue to be in the retail video industry or in any specific industry related to the retail video industry. In any case, the Company plans to
reduce its work force and expenses to a minimum level in the event of such sale.



Item 6. Exhibits and Reports on Form 8-K.



|(a) |  | Exhibits
|--- |  | --------



|Exhibits |  | Description                                                                              
|-------- |  | -----------------------------------------------------------------------------------------
|         | 
|2.1      |  | Asset Purchase Agreement, dated June 20, 2003, between the Company and M.G. Midwest, Inc.
|         | 
|10.1     |  | Form of Secured Promissory Note for private placement investment                         
|         | 
|99.1     |  | Certification Pursuant to 18 U.S.C. Section                                              



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|(b) |  | Reports on Form 8-K
|--- |  | -------------------



On June 11, 2003 the Company filed a current report on Form 8-K, dated May 14, 2003, to report under Item 2, Item 5 and Item 7, the disposition of two of
its retail video stores to M.G. Midwest, Inc. and the current status of certain matters.



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)                 
|              | 
|June 23, 2003 |  | /S/ Timothy L. Ford          
|              | 
|              |  | Timothy L. Ford              
|              | 
|              |  | Chief Executive Officer      
|              | 
|              |  | (Principal Executive Officer)
|              | 
|June 23, 2003 |  |                              
|              |  | /S/ Rudolph R. Patino        
|              | 
|              |  | Rudolph R. Patino            
|              | 
|              |  | Chief Financial Officer      
|              | 
|              |  | (Principal Financial Officer)



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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-QSB 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

| | 
| | 

Timothy L. Ford

Chief Executive Officer

DATED: June 23, 2003



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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-QSB 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

| | 
| | 

Rudolph R. Patino

Chief Financial Officer

(Principal Financial and Accounting Officer)

DATED: June 23, 2003





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