Video City Floats Plan to Emerge From Chapter 1122 Jun, 2001 By: Joan Villa
Video City is circulating a reorganization plan that would let it emerge from Chapter 11 bankruptcy proceedings next month — if the chain’s biggest creditors are willing to give up millions of dollars owed in exchange for stock in the newly reorganized company.
The 44-store chain needs majority approval from some 1,700 creditors andshareholders representing two-thirds of the cash owed, and the nod of a U.S. District Court judge at a July 10 hearing. Creditor votes or objections must be filed with the U.S. Bankruptcy Court for the Central District ofCalifornia before June 29.
“We believe it’s a fair plan for everybody and it’s a much better alternative than converting to Chapter 7,” or forced liquidation, explainsVideo City attorney Marty Brill, of Los Angeles law firm Levene, Neale, Bender, Rankin & Brill. “It also preserves some equity for the old shareholders, [and allows] Video City to emerge as a much stronger publiccompany.”
However, the chain’s largest creditors, distributors Ingram Entertainment and Rentrak Corp., owed $14.77 million and $12.7 million, respectively, would split with four other top creditors approximately 5.53 million shares of stock as total payment. Studios Warner, Universal, Buena Vista, Paramount and Artisan, owed a total $833,000 in estimated revenue-sharing fees, wouldalso receive stock in lieu of cash.
Common stock shareholders would receive one share of stock in the reorganized company for each 23.53 shares they own.
The “very complex” 45-page plan, which was distributed with an explanatory 175-page disclosure statement, is the result of negotiations between the company and the creditors committee, Brill notes. As a result, “we expect to confirm even if there are objections, but it’s not a rubber stamp by thebankruptcy judge,” he says. “We believe we’ll be able to overcome anyobjections that are filed.”
Former c.e.o. and company founder Robbie Lee will no longer be at the helm of the newly restructured chain, which has relocated its headquarters back to Bakersfield, Calif., to be near the majority of its stores. The chain had moved corporate offices to Philadelphia in October 1999, anticipating a since-abandoned merger with West Coast Video.
Lee relinquished day-to-day management in March to Timothy Ford, a longtimeemployee who has held several Video City positions, but Lee still serves as chairman of the company’s five-member board, “until a replacement can be found for him,” Brill says. “It is not his intent to stay on as chairman.”The reorganization plan gives the creditors committee the option of choosing three directors of its own and Lee could be one of them, Brill notes.
After reorganization, Video City will emerge with $300,000 in cash and $1million to $1.2 million in trade credit that the company hopes to receive from its suppliers, including $800,000 from Ingram on 60-day payment terms, according to the filing.
Ingram president and chairman David Ingram declined to explain the company’s strategy in devising a future working relationship with Video City. “Obviously we’re going to work in Ingram Entertainment’s best interests in this situation going forward,” he says.
Although Rentrak would also be willing to ship to a reorganized Video City,chairman and c.e.o. Paul Rosenbaum insists no special payment terms or credit will be extended. “Fool me once, shame on you, fool me twice, shame on me,” quips Rosenbaum, who says his company has already written off $9.6 million in uncollectible Video City debt. “We’re no longer going to make loans to our customers. Their business has to be guaranteed upfront or we’re not going to do it.”
The plan does allow $1.5 million in payment to Fleet Finance, the bank thatforced the bankruptcy filing last August when it accelerated Video City’spayment schedule on some $10 million in senior secured debt. The payment is part of a compromise that also dismissed a pending Video City lawsuit against the lender, according to the filing. In addition, some 65 cities, counties and states with overdue sales tax and property tax bills wouldalso be paid, many on five-year schedules.
Ford will get $160,000 per year to continue as c.e.o., while Rudy Patino will continue as c.f.o., the document states. President and chief operating officer Richard Gibson resigned March 31 and executive v.p. of retail operations James Kelly left the company April 30.