From the mencoder man page:
Crops the given part of the image and discards the rest. Useful to remove black bands from widescreen movies.
Cropped width and height, defaults to original width and height.
Position of the cropped picture, defaults to center.
It is a video filter (vf) so you apply it like this:
mencoder -o out.mp4 -vf crop=320:240:0:10 in.mp4 for cropping a 320x240 region from point (x,y)=(0,10).
There is a sharpen filter too:
Specifies software scaler parameters.
-vf scale -ssf lgb=3.0
gaussian blur filter (luma)
gaussian blur filter (chroma)
sharpen filter (luma)
sharpen filter (chroma)
chroma horizontal shifting
chroma vertical shifting
You can apply the crop filter first, or you can apply the sharpen filter first, but it is probably faster to crop first since you are throwing data outside the crop region away anyway.
You're not gonna get much improvement. VCD uses MPEG-2 which is a pretty bad codec compared to modern standards.
The black bars are not inherently the fault of the VCD format. If your original source had the aspect ratio of 2.35:1, it would need to be letterboxed to fit in the supported 16:9 format. However, it is not necessary to letterbox a 16:9 source in 4:3.