<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission file number 0-14023
Video City, Inc.
----------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-3897052
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6840 DISTRICT BOULEVARD, BAKERSFIELD, CALIFORNIA 93313
(Address of principal executive offices) (Zip Code)
(805) 397-7955
--------------
(Registrant's telephone number, including area code)
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.
Class Outstanding at June 12, 1998
- ----- ----------------------------
Common Stock 11,589,039
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VIDEO CITY, INC.
BALANCE SHEETS
CONSOLIDATED
<TABLE>
<CAPTION>
April 30, January 31,
1998 1998
----------- ----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 40,565 $ 28,127
Accounts receivable 531,055 758,101
Notes receivable 231,177 355,430
Merchandise inventories 756,600 339,759
Other 722,024 411,536
----------- ----------
Total current assets 2,281,421 1,892,953
Videocassette rental inventory, net of
Accumulated amortization 6,328,944 2,795,258
Property and Equipment, net 1,715,230 859,708
Prism Film Library 0 818,171
Good Will 924,141 0
Other assets 1,071,340 233,226
----------- ----------
Total assets $12,321,076 $6,599,316
=========== ==========
</TABLE>
See accompanying notes to financial statements.
2
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VIDEO CITY, INC.
BALANCE SHEETS
CONSOLIDATED
<TABLE>
<CAPTION>
April 30, January 31,
1998 1998
----------- -----------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 4,484,222 $ 2,166,027
Accrued expenses 608,901 702,293
Current portion of long-term debt 749,793 1,674,457
----------- -----------
Total current liabilities 5,495,924 4,542,777
Long-term debt 5,311,731 2,043,431
Other liabilities 579,947 711,931
----------- -----------
Total liabilities 11,734,596 7,298,139
Stockholders' equity:
Common stock, $.01 par value per share,
Authorized 20,000,000 shares; issued and
Outstanding 11,859,039 shares at April 30
and 9,773,927 shares at January 31, 1998 115,890 97,739
Additional paid-in capital 8,328,162 7,075,735
Accumulated deficit (7,857,572) (7,872,297)
----------- -----------
Total stockholders' equity 586,480 (698,823)
Total Liabilities and Stockholders' Equity $12,321,076 $ 6,599,316
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
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VIDEO CITY, INC.
STATEMENTS OF OPERATIONS
CONSOLIDATED
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
April 30, April 30,
1998 1997
----------- ----------
<S> <C> <C>
Revenues:
Rental revenues and product sales $ 3,391,323 $2,281,317
Management Fee Income 42,833 61,500
----------- ----------
Total Revenues 3,434,156 2,342,817
Operating Costs and Expenses:
Store operating expenses 1,715,269 1,068,818
Amortization of videocassette rental inventory 453,237 624,899
Cost of product sales 212,949 223,921
Cost of leased product 237,091 103,110
General and administrative expenses 678,741 504,848
----------- ----------
Total operating costs and expenses 3,297,287 2,525,596
Income (loss) from operations 136,869 (182,779)
Other (Income) Expense:
Interest expense 122,144 152,832
----------- ----------
Net income (loss) 14,726 (335,611)
=========== ==========
Basic earnings (loss) per share 0.00 0.03
Diluted earnings (loss) per share 0.00 0.03
Weighted average number of common
shares outstanding
Basic 10,540,308 9,753,927
Diluted 11,126,998 9,753,927
</TABLE>
See accompanying notes to financial statements.
4
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VIDEO CITY, INC.
STATEMENTS OF CASH FLOWS
CONSOLIDATED
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
April 30, April 30,
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities:
Net Income (loss) $ 14,725 $ (335,611)
Adjustments to reconcile net loss to net cash provided by
Operating activities:
Depreciation and amortization 534,020 760,457
Non-cash interest 2,974
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 227,046 367,688
Decrease (increase) in notes receivable 124,253 24,366
Decrease (increase) in merchandise inventories (416,841) (134,654)
Decrease (increase) in other assets (2,072,743) (115)
Increase (decrease) in accounts payable 2,318,195 (624,210)
Increase (decrease) in accrued expenses (93,392) (101,989)
Increase (decrease) in other liabilities (131,982) (635)
----------- -----------
Total adjustments 488,556 297,886
----------- -----------
Net cash provided by (used in) operating activities 503,281 (37,725)
Cash flows from investing activities:
Purchases of videocassette rental inventory, net (3,739,966) (475,231)
Purchases of fixed assets (933,809) (42,475)
Proceeds from Sale of Prism Film Library 818,171
Net cash used in investing activities (3,855,604) (517,706)
Cash flows from financing activities:
Principal payments on obligations under capital leases (18,136) (68,478)
Repayment of long-term debt (3,539,752) (498,345)
Proceeds from issuance of long-term debt 5,652,071 -
Proceeds from issuance of common stock for acquisitions 1,270,578
Net cash provided by (used in) financing activities 3,364,761 (566,823)
Net Increase (decrease) in cash 12,438 (1,122,254)
Cash at beginning of the period 28,127 1,246,517
----------- -----------
Cash at end of the period 40,565 124,263
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
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VIDEO CITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
The financial statements as of April 30, 1998 and for the quarterly periods
ended April 30, 1998 and April 30, 1997 are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. It is recommended that these financial statements be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year ended
January 31, 1998.
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, 1998 and the results of operations and
cash flows for the three months ended April 30, 1998 and April 30, 1997. 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.
The consolidated financial statements include the accounts of Video City,
Inc. and its majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The Company acquired
five corporations owning and operating an aggregate of 29 retail video stores
and began reporting their transactions on a consolidated basis on March 25,
1998.
2. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS No. 128), "Earnings Per Share", which established new standards for
calculating and disclosing earnings per share. All prior period earnings per
share data has been restated to conform with the provisions of SFAS No. 128.
Diluted basic earnings/loss per share computations are based on the weighted
average number of common shares outstanding. Diluted earnings/loss per share
includes the effect from the assumed exercise of dilutive options and warrants.
Statements of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The adoption of SFAS No. 129 did not have a material
effect, if any, on its financial position or results of operations.
Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" (SFAS No.130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income/loss does not
differ from net income/loss.
Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the
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enterprise and in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate and their major customers. The Company has not determined the
effect, if any, of SFAS No. 131 on its Results of Operations.
3. RECENT EVENTS
The Company sold the rights to its Film Library and related accounts
receivable on March 25, 1998 to an entity owned and controlled by Stephen C.
Lehman, a member of the Company's Board of Directors for $1,350,000 in cash. No
gain or loss was recognized upon sale since the film library was stated at the
net realizable value at January 31, 1998. The proceeds were used to retire
indebtedness to Imperial Bank. The Company entered into a new $7.5 million
senior credit agreement with FINOVA on March 25, 1998. The initial advance of
$5.5 million was used to refinance substantially all company debt and fund the
cash portion of acquisitions completed concurrently. The Company acquired five
video retail companies on March 25, 1998 for an aggregate consideration of $1.9
million in cash, $1.17 million in assumption of payables, and 1,815,112 shares
of the Company's common stock, subject to subsequent adjustment. In conjunction
with these acquisitions, Rentrak Corporation agreed to convert $210,000 of the
Company's accounts payable balance to a subordinated note. Subsequent to year
end, the Company issued warrants to purchase 125,000 shares of the Company's
common stock at an exercise price of $2.00 per share to directors and
consultants. On May 27, 1998, the Company amended its Certificate of
Incorporation to increase the number of authorized shares of common stock to
30,000,000 shares, and to authorize 2,000,000 shares of the Company's preferred
stock.
7
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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, particularly
under this Item 2, may constitute "forward-looking statements" within the
meaning of 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.
On March 25, 1998, the Company acquired five corporations owning and
operating an aggregate of 29 retail video stores. These acquisitions increased
the Company's chain of retail video stores from 18 to 47 stores, and were
accounted for using purchase accounting. Concurrent with the acquisitions, the
Company sold the rights to its library of 47 feature films and other properties
and related accounts receivable for $1,350,000 in cash. The film library is
stated at the net realizable value at January 31, 1998. In addition, the
Company and its five newly acquired subsidiaries entered into a $7,500,000 Loan
and Security Agreement with FINOVA Capital Corporation ("FINOVA"), secured by
all of the assets of the Company. The balance sheet as of April 30, 1998 and
the statement of operations for the three months then ended reflect these recent
transactions on March 25, 1998 and the subsequent operations of the five newly
acquired companies during the three months period.
RESULT OF OPERATIONS
Three months ended April 30, 1998 compared to three months ended April 30, 1997
REVENUES
Rental revenues increased $1,091,000, or 46.6%, to $3,434,000 for the three
months ended April 30, 1998 compared to $2,343,000 for the three months ended
April 30, 1997. The increase in revenues was primarily due to the purchase of
five corporations owning 29 stores by the Company in March 1998. Same store
revenues for the three months ended April 30, 1998 increased by approximately
5.9% compared to the same period ending April 30, 1997. Management fee income
decreased $19,000, or 30.3% to $43,000 for the three months ended April 30,
1998 compared to $62,000 for the same period ending April 30, 1997. The
decrease resulted from the reduction in the number of managed stores from six to
two, as four of the licensees were among the 29 acquired stores.
STORE OPERATING EXPENSES
Store operating expenses increased $646,000, or 60.4%, to $1,715,000 for
the three months ended April 30, 1998 compared to $1,069,000 for the three
months ended April 30, 1997. The increase was primarily due to the purchase of
29 stores by the Company in March 1998. Store operating expenses as a
percentage of total revenue was 49.9% in 1998 compared to 45.6% in 1997. The
increase was primarily due to initial payroll, supply, and maintenance expenses
for the 29 newly acquired stores.
AMORTIZATION OF VIDEOCASSETTE RENTAL INVENTORY
Amortization of videocassette rental inventory decreased $172,000, or
27.5%, to $453,000 for the three months ended April 30, 1998 compared to
$625,000 for the three months ended April 30, 1997. The decrease was primarily
due to the change in salvage value from $0 to $6 and the purchased stores rental
inventory having a lower than average initial cost per unit.
COST OF PRODUCT SALES
Cost of product sales decreased by $11,000, or 4.9%, to $213,000 for the
three months ended April 30, 1998 compared to $224,000 for the three months
ended April 30, 1997. Cost of product sales as a percentage of total revenue
for the three months ended April 30, 1998 was 6.2% compared to 9.6% for the
three months ended April 30, 1997. The decrease was primarily due to the 29
acquired stores having less merchandise for sale initially than the Company's
existing 18 stores, and the Company merchandising higher profit margin items.
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COST OF LEASED PRODUCT
Cost of leased product increased by $134,000, or 130% to $237,000 for the
three months ended April 30, 1998 compared to $103,000 for the three months
ended April 30, 1997. Cost of leased product as a percentage of total revenue
for the three months ended April 30, 1998 was 6.9% compared to 4.4% for the
three months ended April 30, 1997. The increase was due to the purchase of 29
stores by the Company in March 1998 and the Company leasing additional titles to
provide "guaranteed" rentals periodically in all stores.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $174,000, or 34.5%, to
$679,000 for the three months ended April 30, 1998 compared to $505,000 for the
three months ended April 30, 1997. General and administrative expenses as a
percentage of total revenue for the three months ended April 30, 1998 was 19.8%
compared to 21.5% for the three months ended April 30, 1997. The increase is
primarily due to the costs to support the additional 29 stores.
INTEREST EXPENSE
Interest expense decreased $31,000, or 20.3%, to $122,000 for the three
months ended April 30, 1998 compared to $153,000 for the three months ended
April 30, 1997. The decrease in interest expense was primarily due to the
reduction of long-term debt of the Company from the proceeds of the sale of the
Prism Film Library. The Prism film library had been written down to net
realizable value as of January 31, 1998.
INCOME TAXES
The Company had no income tax expense for the three months ended April 30,
1998 or the three months ended April 30,1997 as it had no taxable income during
these periods. The Company's effective income tax rate varied from the statutory
federal tax rate as a result of operating losses for which no tax had been
recognized due to the valuation allowance on the net deferred tax asset. A full
valuation allowance has been established as Management has not determined that
it is more likely than not that the deferred tax asset will be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS No. 128), "Earnings Per Share", which established new standards for
calculating and disclosing earnings per share. All prior period earnings per
share data has been restated to conform with the provisions of SFAS No. 128.
Diluted basic earnings/loss per share computations are based on the weighted
average number of common shares outstanding. Diluted earnings/loss per share
includes the effect from the assumed exercise of dilutive options and warrants.
Statements of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The adoption of SFAS No. 129 did not have a material
effect, if any, on its financial position or results of operations.
Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" (SFAS No.130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income/loss does not
differ from net income/loss.
Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers. The Company has not determined the
effect, if any, of SFAS No. 131 on its Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its short-term working capital needs, including the
acquisition of videocassettes and other inventory, primarily through cash from
operations. The Company expects that cash from operations will be sufficient to
fund future videocassette and other inventory purchases and other working
capital needs. Videocassette rental inventories are accounted for as noncurrent
assets under generally accepted accounting principles because they are not
assets which are reasonably expected to be completely realized in cash or sold
in the normal business cycle. Although the rental of this inventory generates a
substantial portion of the Company's revenue, the classification of these assets
as noncurrent excludes them from the computation of working capital. The
acquisition cost of videocassette rental inventories, however, is reported as a
current liability until paid and, accordingly, included in the computation of
working capital. Consequently, the Company believes working capital is not as
significant a measure of financial condition for companies in the video retail
industry as it is for companies in other industries. Because of the accounting
treatment of videocassette rental inventory as a noncurrent asset, the Company
anticipates that it will operate with a working capital deficit during fiscal
1999.
The Company's primary long-term capital needs are for opening and acquiring
new stores. The Company expects to fund such needs through cash flows from
operations, the net proceeds from the possible sale of debt or equity
securities, credit facilities, trade credit, and equipment leases. On March 25,
1998, the Company and its five newly acquired subsidiaries entered into a
$7,500,000 Loan and Security Agreement with FINOVA, secured by all of the assets
of the Company. Of these funds, $5,700,000 has been or may be used to pay the
cash portion of the acquisition purchase prices, to repay other existing
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indebtedness of Video City, to repay certain existing indebtedness of the
acquired companies, and to provide inventory financing and working capital for
the expanded retail operation of the combined companies. The remaining
$1,800,000 of the credit facility may be used only to finance future
acquisitions, if any.
As of April 30, 1998, the total outstanding balance under the FINOVA credit
facility was approximately $5,400,000, consisting of outstanding amounts under
term loans of approximately $5,200,000 and outstanding amounts under a revolving
loan of approximately $200,000. There were approximately $11,000 (net of
reserves) in amounts available under the revolving loan as of April 30, 1998.
The Company currently intends to finance future acquisitions with funds from
borrowings, including the credit facility established with FINOVA, through
assumption of liabilities by the Company and net proceeds from the sale of debt
or equity financing. The full $1,800,000 of the FINOVA credit facility is
available to finance future acquisitions, if any, subject to approval by FINOVA.
In conjunction with the sale of its film library on March 25, 1998, the
Company paid off in full the promissory note to Imperial Bank, which had a
balance at January 31, 1998 of $1,411,306.
CASH FLOWS
Three Months ended April 30, 1998 Compared to Three Months ended April 30, 1997
Net cash provided by operating activities increased by approximately
$541,000 primarily due to an increase in accounts payable and a decrease in
accounts and notes receivables partially offset by an increase in other assets
and merchandise inventories. Net cash used in investing activities increased by
$3,338,000 primarily due to the acquisition of 29 stores, partially offset by
the sale of the Prism Film Library. Net cash provided by financing activities
increased $3,932,000 mainly due to the proceeds received from the FINOVA credit
facility and the issuance of common stock in satisfaction of a portion of the
acquisition purchase price on the 29 stores, partially offset by the repayment
of existing debt of the Company.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On March 25, 1998, the Company issued 1,150,000 shares of its Common Stock
to certain owners of the companies recently acquired by the Company as part of
the purchase price of such acquired companies. In addition, pursuant to a
restructured debt agreement between the Company and Rentrak Corporation
("Rentrak"), the Company issued 665,112 additional shares of its Common Stock to
Rentrak in settlement of a lawsuit Rentrak had previously filed against one of
the acquired companies and in payment of indebtedness owed to Rentrak by another
acquired company. As part of the consideration to FINOVA Capital Corporation
in connection with the establishment of the Company's credit facility, the
Company issued to FINOVA a warrant which gives FINOVA the right either (i) to
require the Company to repurchase the warrant for $600,000 at any time
commencing March 25, 2001 and expiring March 25, 2005, or (ii) to purchase
520,720 shares of the Company's Common Stock at a price of $0.01 per share but
only if, prior to March 25, 2005, Robert Y. Lee's ownership of the Company's
outstanding Common Stock decreases to 10 percent or less, or the Company makes a
public offering of shares of its Common Stock, or the Company terminates the
Loan and Security Agreement with FINOVA, or the Company recapitalizes,
refinances, reorganizes, or sells substantially all of its assets. The Company
also granted options to purchase a total of 25,000 shares of Common Stock and
issued warrants to purchase 100,000 shares of Common Stock at an exercise price
of $2.00 per share to its directors and consultant.
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The Company believes that the issuances of its securities pursuant to the
foregoing transactions were exempt from registration under the Securities Act of
1933, as amended, by virtue of Section 4(2) thereof as transactions not
involving public offerings.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The shareholders of the Company approved an amendment (the "Amendment") to
the Company's Certificate of Incorporation to increase the number of authorized
shares of Common Stock to 30,000,000 shares and to authorize 2,000,000 shares of
the Company's preferred stock, which may be issued in one or more series on
terms and conditions that may be established by the Board of Directors of the
Company from time to time. The Amendment was approved and adopted by the
affirmative written consents of the holders of more than a majority of the
outstanding shares of Common Stock of the Company. The Amendment became
effective on May 27, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
--------
<TABLE>
<CAPTION>
Numbers Description
- ------- -----------
<S> <C>
3.1 Certificate of Amendment of Certificate of Incorporation of the
Company.
3.2 Certificate of Designations for the Company's Series A Convertible
Redeemable Preferred Stock.
10.1 Agreement of Merger and Plan of Reorganization among Video City,
Inc., Video Adventures Corp., Adventures in Video, Inc. and David A.
Ballstadt, dated as of March 25, 1998.(1)
10.2 Agreement of Merger and Plan of Reorganization among Video City,
Inc., Video Ballstadt Corp., KDDJ Investments, Inc. and David A.
Ballstadt, dated as of March 25, 1998.(1)
10.3 Agreement of Merger and Plan of Reorganization among Video City,
Inc., Video Acquisition Corp., Leptis Magna, Inc. d/b/a Video
Unlimited and G. Wayne Bailey and Orawan Bailey, dated as of March 25,
1998.(1)
10.4 Agreement of Merger and Plan of Reorganization among Video City,
Inc., Video Republic Corp., Old Republic Entertainment, Inc. and C.
Anthony Anderson, dated as of March 25, 1998.(1)
10.5 Agreement of Merger and Plan of Reorganization among Video City,
Inc., Video Sulpizio Corp., Sulpizio One, Inc., Dennis Rhoton and
Edward Rheinhardt, dated as of March 25, 1998.(1)
10.6 Film Rights Transfer Agreement dated as of March 23, 1998 by and
among Conrad Entertainment, LLC and Video City, Inc.(1)
10.7 Loan and Security Agreement dated as of March 24, 1998 by and among
FINOVA Capital Corporation and Video City, Inc., Adventures in Video,
Inc., KDDJ Investments, Inc., Leptis Magna, Inc., Old Republic
Entertainment, Inc. and Sulpizio One, Inc.(1)
</TABLE>
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<TABLE>
<S> <C>
10.8 Warrant issued to FINOVA Capital Corporation.(1)
10.9 Restructured Debt Agreement dated March 25, 1998, by and between
Rentrak Corporation, Mortco, Inc., Video City, Inc., Sulpizio One,
Inc. and Adventures in Video, Inc.(1)
10.10 Employment Agreement, dated March 25, 1998, between the Company and
David A. Ballstadt.
27.1 Financial Data Schedule.
</TABLE>
____________________
(1) Previously filed as exhibits to the Company's Current Report on Form 8-K,
dated March 25, 1998, and incorporated herein by reference.
(b) Reports on Form 8-K:
-------------------
On April 9, 1998, the Company filed a Current Report on Form 8-K, dated
March 25, 1998, to report under Item 2. and Item 5. the acquisition of five
companies, the sale of its film library, and the entering into of a new credit
facility and a restructured debt agreement. On June 8, 1998, the Company filed
an amendment to such Current Report to report under Item 7 the financial
statements of the businesses acquired and the pro forma financial statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIDEO CITY, INC.
Date: June 13, 1998 /s/ Robert Y. Lee
-----------------
Robert Y. Lee
Chief Executive Officer
(Principal Executive Officer)
Date: June 13, 1998 /s/ Timothy J. Denari
---------------------
Timothy J. Denari
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION OF
VIDEO CITY, INC.
Video City, Inc. (the "Corporation"), a corporation organized and existing
under and by virtue of the General Corporation Law of the state of Delaware,
does hereby certify:
1. That the board of directors of the Corporation, at a meeting duly
convened and held, adopted a resolution proposing and declaring advisable the
following amendment to the Certificate of Incorporation of the Corporation:
RESOLVED, that Paragraph 4 of the Certificate of Incorporation of the
Corporation be amended to read in full as follows:
4. (a) The Corporation is authorized to issue two classes of stock,
to be designated "Common Stock" and "Preferred Stock," respectively. The
total number of shares which the Corporation is authorized to issue is
thirty-two million (32,000,000) shares. The number of shares of Common
Stock authorized to be issued is thirty million (30,000,000), with a par
value of $0.01 per share. The number of shares of Preferred Stock
authorized to be issued is two million (2,000,000), with a par value of
$0.01 per share.
(b) The Preferred Stock may be issued from time to time in one
or more series. The Board of Directors is hereby authorized, by filing a
certificate (a "Preferred Stock Designation") pursuant to the Delaware
General Corporation Law, to fix or alter from time to time by resolution or
resolutions the designations and the powers, preferences and relative,
participating, optional and other special rights, and without limitation
the rights with respect to voting, dividends, conversion rights, redemption
prices and liquidation preference, of any series of shares of Preferred
Stock, and to establish from time to time the number of shares constituting
any such series, and to increase or decrease the number of shares of any
series subsequent to the issuance of shares of that series, but not below
the number of shares of such series then outstanding. In case the number of
shares of any series shall be decreased in accordance with the foregoing
sentence the shares constituting such decrease shall resume the status that
they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
1.
<PAGE>
2. That in lieu of a meeting and vote of the stockholders, a majority of
the stockholders have given written consent to said amendment in accordance with
the provisions of Section 228 of the General Corporation Law of the State of
Delaware, and said written consent was filed with the Corporation.
3. That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of Sections 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by Robert Y. Lee, its Chairman of the Board, and James
Craig Kelly, its Secretary, this 27th day of May, 1998.
/s/ Robert Y. Lee
____________________________________
Robert Y. Lee, Chairman of the Board
(SEAL) /s/ James Craig Kelly
____________________________________
James Craig Kelly, Secretary
2.
<PAGE>
EXHIBIT 3.2
VIDEO CITY, INC.
CERTIFICATE OF DESIGNATIONS
_________________
Pursuant to Section 151
of the General Corporation Law of the State of Delaware
__________________
Video City, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, does hereby certify
that pursuant to the provisions Section 151 of the General Corporation Law of
the State of Delaware, its Board of Directors adopted the following resolution
on April 29, 1998, which resolution remains in full force and effect as of the
date hereof:
WHEREAS, the Board of Directors of the Corporation (the "Board of
Directors") is authorized, within the limitations and restrictions stated in the
Corporation's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), to fix by resolution or resolutions the designation, powers,
preferences, voting rights and other rights of each series of preferred stock,
and the qualifications, limitations or restrictions thereof, and such other
subjects or matters as may be fixed by resolution or resolutions of the Board of
Directors under the General Corporation Law of Delaware; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its
authority as aforesaid, to authorize and fix the terms of a series of preferred
stock and the number of shares constituting such series:
NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized such series
of preferred stock on the terms and with the provisions herein set forth:
1. DESIGNATION OF SERIES. The designation of such series of preferred stock
is Series A Convertible Redeemable Preferred Stock ("Series A Preferred Stock").
The number of shares constituting such series is 20,000, with a value of $100
per share for the purpose of calculating dividends and amounts payable upon
liquidation, dissolution or winding up ("stated value"). Shares of Series A
Preferred Stock redeemed, converted or purchased by the Corporation shall be
canceled and shall revert to authorized but unissued shares of preferred stock
undesignated as to series.
2. DIVIDENDS. The holders of the outstanding Series A Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of Directors, out
of funds legally available therefor, dividends at the annual rate of 9.0% of the
stated value per share of Series A Preferred Stock. Such dividends shall be
payable semi-annually, on November 30 and May 31 of each year (each of such
dates being a "Dividend Payment Date"), commencing November 30, 1998. Declared
but unpaid dividends shall not bear interest.
<PAGE>
3. VOTING. The holders of Series A Preferred Stock shall not be entitled to
vote upon any matter except as otherwise required by law.
4. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of Series A Preferred Stock shall be entitled to receive out of the
assets of the Corporation, whether such assets are capital or surplus of any
nature, an amount per share of Series A Preferred Stock equal to the stated
value of such share of Series A Preferred Stock and a further amount equal to
any dividends declared and unpaid thereon, if any, as provided in Paragraph 2
hereof, to the date that payment is made available to the holders of Series A
Preferred Stock, and no more, before any payment shall be made or any assets
distributed to the holders of shares of Common Stock.
If upon such liquidation, dissolution or winding up, the assets thus
distributed among the holders of the Series A Preferred Stock shall be
insufficient to permit the payment to such stockholders of the full preferential
amounts aforesaid, then the entire assets of the Corporation to be distributed
shall be distributed ratably among the holders of Series A Preferred Stock.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, subject to the provisions of the Corporation's
Certificate of Incorporation, as amended, and to all of the preferential rights
of the holders of Series A Preferred Stock on distribution or otherwise, the
holders of Common Stock shall be entitled to receive, ratably, all remaining
assets of the Corporation.
A consolidation or merger of the Corporation with or into any other
corporation or corporations, or a sale of all or substantially all of the assets
of the Corporation, shall not be deemed to be a liquidation, dissolution or
winding up within the meaning of this Paragraph 4.
5. CONVERSION RIGHTS. The holder of any shares of Series A Preferred Stock
shall have the right at any time commencing from the date of issuance to convert
any of his or her shares of Series A Preferred Stock into duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock of the
Corporation at the Conversion Price, as defined herein, and upon the terms set
forth herein.
6. CONVERSION PRICE. Each share of Series A Preferred Stock shall be
converted into a number of shares of Common Stock determined by dividing (i)
$100 by (ii) the Conversion Price in effect on the Conversion Date. The
Conversion Price at which shares of Common Stock shall initially be issuable
upon conversion of the shares of Series A Preferred Stock shall be $2.00. The
Conversion Price shall be subject to adjustment as set forth in Paragraph 8
hereof. No payment or adjustment shall be made for any dividend or other
distribution that is payable on the Common Stock issued upon such conversion.
2.
<PAGE>
7. CONVERSION PROCEDURE. The holder of any shares of the Series A Preferred
Stock may exercise his or her right to convert such shares into shares of Common
Stock by surrendering for such purpose to the Corporation, at its principal
office or at such other office or agency maintained by the Corporation for that
purpose, a certificate or certificates representing the shares of Series A
Preferred Stock to be converted, accompanied by a written notice stating that
such holder elects to convert all or a specified whole number of such shares in
accordance with the provisions of this Paragraph 7 and specifying the name or
names in which such holder wishes the certificate or certificates for shares of
Common Stock to be issued. In case such notice shall specify a name or names
other than that of such holder, such notice shall be accompanied by payment of
all transfer taxes payable upon the issuance of shares of Common Stock in such
name or names. As promptly as practicable, and in any event within ten business
days after the surrender of such certificates and the receipt of such notice
relating thereto and, if applicable, payment of all transfer taxes, the
Corporation shall deliver or cause to be delivered (i) certificates representing
the number of validly issued, fully paid and nonassessable shares of Common
Stock to which the holder of the Series A Preferred Stock so converted shall be
entitled and (ii) if less than the full number of shares of the Series A
Preferred Stock evidenced by the surrendered certificate or certificates are
being converted, a new certificate or certificates, of like tenor, for the
number of shares evidenced by such surrendered certificate or certificates less
the number of shares converted. Such conversions shall be deemed to have been
made at the close of business on the date of giving of such notice and of such
surrender of the certificate or certificates representing the shares of the
Series A Preferred Stock to be converted so that the rights of the holder
thereof shall cease except for the right to receive Common Stock in accordance
herewith, and the converting holder shall be treated for all purposes as having
become the record holder of such Common Stock at such time.
Shares of the Series A Preferred Stock may not be converted after the close
of business of the fifth business day preceding the date fixed for redemption of
such shares pursuant to Paragraph 13 hereof.
Upon conversion of any shares of the Series A Preferred Stock, the holder
thereof shall not be entitled to receive any accumulated, accrued or unpaid
dividends in respect of the shares so converted, provided that such holder shall
be entitled to receive any dividends on such shares of the Series A Preferred
Stock declared prior to such conversion if such holder held such shares on the
record date fixed for the determination of holders of the Series A Preferred
Stock entitled to receive payment of such dividend.
8. CONVERSION PRICE ADJUSTMENTS. The Conversion Price shall be subject to
adjustment from time to time upon the occurrence of certain events as follows:
a. Stock Dividends, Subdivisions, Reclassifications or Combinations. If
the Corporation shall (i) declare a dividend or make a distribution in shares of
3.
<PAGE>
Common Stock, (ii) subdivide or reclassify the outstanding shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify the
outstanding Common Stock into a smaller number of shares, the Conversion Price
in effect at the time of the record date of such dividend or distribution or on
the effective date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of any shares of Series A Preferred
Stock surrendered for conversion after such date shall be entitled to receive
the number of shares of Common Stock which he or she would have owned or been
entitled to receive had such Series A Preferred Stock been converted immediately
prior to such date. Successive adjustments in the Conversion Price shall be
made whenever any event specified above shall occur.
b. Other Distributions. In case the Corporation shall fix a record date
for the making of a distribution to all holders of shares of Common Stock, (i)
of shares of any class of capital stock of the Corporation other than shares of
Common Stock, or (ii) of evidences of indebtedness of the Corporation, or (iii)
of assets (excluding cash dividends or distributions, and dividends or
distributions referred to in subparagraph 8(a) hereof), or (iv) of rights or
warrants entitling the holders of Common Stock to subscribe for or purchase
shares of Common Stock at less than the Trading Price, as defined in Paragraph
13 hereof, on the record date fixed to determine stockholders entitled to
subscribe or purchase; in each such case, the Conversion Price in effect
immediately prior thereto shall be reduced immediately thereafter to the price
determined by dividing (1) an amount equal to the difference resulting from (A)
the number of shares of Common Stock outstanding on such record date multiplied
by the Conversion Price per share on such record date, less (B) the fair market
----
value (as determined by the Board of Directors in their reasonable discretion)
of said shares or evidences of indebtedness or assets or rights or warrants to
be so distributed by (2) the number of shares of Common Stock outstanding on
such record date. Such adjustment shall be made successively whenever such a
record date is fixed. In the event that such distribution is not so made, the
Conversion Price then in effect shall be readjusted, effective as of the date
when the Board of Directors determines not to distribute such shares, evidences
of indebtedness, assets, rights or warrants, as the case may be, to the
Conversion Price which was in effect prior to the fixing of the record date
(subject to any adjustments made pursuant to this Paragraph 8 since such record
date).
c. Rounding of Calculations; Minimum Adjustment. All calculations under
this Paragraph 8 shall be made to the nearest cent or to the nearest one-
hundredth of a share, as the case may be. No adjustment in the Conversion Price
shall be made if the amount of such adjustment would be less than $0.01, but any
such amount shall be carried forward and an adjustment with respect thereto
shall be made at the time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so carried forward,
shall aggregate $0.01 or more.
d. Adjustments for Consolidation, Merger, etc. In case the Corporation,
(i) shall consolidate with or merge into any other person and shall not be the
4.
<PAGE>
continuing or surviving corporation of such consolidation or merger, (ii) shall
permit any other person to consolidate with or merge into the Corporation and
the Corporation shall be the continuing or surviving person, but, in connection
with such consolidation or merger, the Common Stock shall be changed into or
exchanged for stock or other securities of any other person or cash or any other
property, (iii) shall transfer all or substantially all of its properties or its
assets to any other person, or (iv) shall effect a capital reorganization or
reclassification of the Common Stock (other than a capital reorganization or
reclassification resulting in the issue of additional shares of Common stock for
which adjustment is provided in this Paragraph 8); then, and in each such case,
proper provision shall be made so that each share of Series A Preferred Stock
then outstanding shall be converted into, or exchanged for, one share of
preferred stock of the acquiring corporation entitling the holder thereof to all
of the rights (including voting rights), powers, privileges and preferences with
respect to the acquiring corporation to which the holder of a share of Series A
Preferred Stock is entitled with respect to the Corporation, and being subject
with respect to the acquiring corporation to the qualifications, limitations and
restrictions to which a share of Series A Preferred Stock is subject with
respect to the Corporation.
9. VOLUNTARY ADJUSTMENT. The Corporation may make, but shall not be obligated
to make, such decreases in the Conversion Price so as to increase the number of
shares of Common Stock into which the Series A Preferred Stock may be converted,
in addition to those required by Paragraph 8 hereof, as it considers to be
advisable in order to avoid federal income tax treatment as a dividend of stock
or stock rights.
10. RESERVATION OF SHARES OF COMMON STOCK FOR CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized and unissued
shares of Common Stock such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all shares of Series A
Preferred Stock that are then outstanding.
11. NOTICE OF ADJUSTMENT OF CONVERSION PRICE. Whenever the Conversion Price is
adjusted as herein provided, the Corporation shall forthwith file with any
transfer agent or agents for the Series A Preferred Stock, if any, and at the
principal office of the Corporation, a statement signed by the President or a
Vice President and by the Chief Financial Officer or the Secretary of the
Corporation setting forth the adjusted Conversion Price. The statement so filed
shall be open to inspection by any holder of record of shares of Series A
Preferred Stock. The Corporation shall also, at the time of filing any such
statement, mail notice to the same effect to the holders of shares of Series A
Preferred Stock at their addresses appearing on the books of the Corporation or
supplied by such holder to the Corporation for the purpose of notice.
12. FRACTIONAL SHARES IN CONVERSION. The Corporation shall not be required to
issue fractions of shares of Common Stock on the conversion of Series A
Preferred Stock. If any fraction of a share of Common Stock would be issuable
upon
5.
<PAGE>
the conversion of a share, except for the provisions hereof, the Corporation
shall purchase such fraction for an amount in cash equal to the Trading Price
(as defined in Paragraph 13 hereof) multiplied by such fraction. If more than
one certificate for shares of Series A Preferred Stock shall be presented for
conversion at any one time by the same registered holder, the number of shares
of Common Stock which shall be issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Common Stock issuable
upon conversion of the shares so presented. All calculations under this
Paragraph 12 shall be made to the nearest one-hundredth of a share.
13. REDEMPTION. The outstanding shares of Series A Preferred Stock are
redeemable as follows:
a. Optional Redemption. Commencing on June 1, 2000, the outstanding
shares of Series A Preferred Stock may be redeemed, in whole or in part, at any
time at the option of the Corporation by resolution of its Board of Directors,
for cash at $100 per share; plus, in each case, all declared and unpaid
----
dividends thereon, if any, to the redemption date. However, the Corporation may
not redeem the shares of Series A Preferred Stock pursuant to this subparagraph
13(a) unless the Common Stock has had a Trading Price (as hereinafter defined in
this Paragraph 13) of not less than 175% of the Conversion Price for 20
consecutive trading days ending not more than two trading days prior to the
Corporation giving notice to the holders thereof. In case of the redemption of
a part only of the outstanding shares of Series A Preferred Stock, the shares so
to be redeemed shall be selected pro rata.
b. Mandatory Redemption. On May 31, 2003, the Corporation shall, subject
to applicable law, redeem all of the then outstanding shares of Series A
Preferred Stock for cash at $100 per share; plus all declared and unpaid
----
dividends thereon, if any, to May 31, 2003.
At least 30 days' previous notice by mail, postage prepaid, shall be given
to the holders of record of the shares of Series A Preferred Stock to be
redeemed, such notice to be addressed to each such stockholder at the address of
such holder appearing on the books of the Corporation or given by such holder to
the Corporation for the purpose of notice, or if no such address appears or is
so given, at the place where the principal office of the Corporation is located.
Such notice shall state the date fixed for redemption and the redemption price
and shall call upon such holder to surrender to the Corporation on said date at
the place designated in the notice such holder's certificate or certificates
representing the shares to be redeemed. On or after the date fixed for
redemption and stated in such notice, each holder of shares of Series A
Preferred Stock called for redemption shall surrender the certificate evidencing
such shares to the Corporation at the place designated in such notice and shall
thereupon be entitled to receive payment of the redemption price, together with
declared and unpaid dividends, if any, to the date fixed for redemption. If
less than all the shares represented by any such surrendered certificate are
redeemed, a new certificate shall be issued representing the unredeemed shares.
If such notice of
6.
<PAGE>
redemption shall have been duly given, and if on the date fixed for redemption
funds necessary for the redemption shall be available therefor, then,
notwithstanding that the certificate evidencing any shares of Series A Preferred
Stock so called for redemption shall not have been surrendered, all rights
pertaining to such shares shall terminate, except only the right of the holders
to receive the redemption price, together with declared and unpaid dividends
thereon, if any, to the date fixed for redemption, without interest, upon
surrender of their certificates therefor.
If, after notice of redemption has been given, the Corporation deposits, on
or prior to any date fixed for redemption of shares of Series A Preferred Stock,
with any bank or trust company in the State of California that has a combined
capital and surplus of not less than $100 million, as a trust fund, a sum
sufficient to redeem, on the date fixed for redemption thereof, the shares
called for redemption, with irrevocable instructions and authority to the bank
or trust company to give the notice of redemption thereof (or to complete the
giving of such notice if theretofore commenced) and to pay, on or after the
date fixed for redemption or prior thereto, the redemption price of the shares
to their respective holders upon the surrender of their share certificates, then
from and after the date of the deposit (although prior to the date fixed for
redemption), the shares shall no longer be outstanding, and the holders thereof
shall cease to be stockholders with respect to such shares, and shall have no
rights with respect thereto except the right to receive from the bank or trust
company payment of the redemption price of the shares without interest, upon the
surrender of their certificates therefor, and the right to convert said shares
as provided herein at any time up to but not after the close of business on the
fifth day prior to the date fixed for redemption of such shares. The deposit
shall constitute full payment of the shares to the holders thereof. Any moneys
so deposited on account of the redemption price of Series A Preferred Stock
converted subsequent to the making of such deposit shall be repaid to the
Corporation forthwith upon the conversion of such shares of Series A Preferred
Stock. Any interest accrued on any funds so deposited shall be the property of,
and paid to, the Corporation. If the holders of Series A Preferred Stock so
called for redemption shall not, at the end of two years from the date fixed for
redemption thereof, have claimed any funds so deposited, such bank or trust
company shall thereupon pay over to the Corporation such unclaimed funds, and
such bank or trust company shall thereafter be relieved of all responsibility in
respect thereof to such holders and such holders shall look only to the
Corporation for payment of the redemption price.
The term "Trading Price" shall be the average for the 20 consecutive
trading days immediately prior to the date requiring a determination of the
prices determined as follows: (i) If the Common Stock is listed or admitted to
trade on a national securities exchange, on the Nasdaq National Market System
("NMS"), or on the Nasdaq SmallCap Market ("SmallCap"), the closing price of the
Common Stock on the composite tape of the principal national securities
exchange on which the Common Stock is so listed or admitted to trade or on the
NMS or SmallCap systems, as the case may be; (ii) If the Common Stock is not
listed or admitted to trade on an exchange or a
7.
<PAGE>
system that publishes daily closing prices, the average of the last bid and
asked prices of the Common Stock quoted on such other trading system.
14. MUTILATED OR MISSING PREFERRED STOCK CERTIFICATES. If any of the Series A
Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the
Corporation shall issue, in exchange and substitution for and upon cancellation
of the mutilated Series A Preferred Stock certificate, or in lieu of and in
substitution for the Series A Preferred Stock certificate lost, stolen or
destroyed, a new Series A Preferred Stock certificate of like tenor and
representing an equivalent amount of shares of Series A Preferred Stock, but
only upon receipt of evidence of such loss, theft or destruction of such Series
A Preferred Stock certificate and indemnity, if requested.
15. REISSUANCE OF PREFERRED STOCK. Shares of Series A Preferred Stock that
have been issued and reacquired in any manner, including shares purchased or
redeemed or exchanged, shall (upon compliance with any applicable provisions of
the laws of the State of Delaware) have the status of authorized and unissued
shares of preferred stock undesignated as to series and may be redesignated and
reissued as part of any series of preferred stock other than the Series A
Preferred Stock.
16. BUSINESS DAY. If any payment, redemption or exchange shall be required by
the terms hereof to be made on a day that banks are not open in the State of
California, such payment, redemption or exchange shall be made on the
immediately succeeding day on which such banks are open.
17. HEADINGS OF SUBDIVISIONS. The headings of various subdivisions hereof are
for convenience of reference only and shall not affect the interpretation of any
of the provisions hereof.
18. SEVERABILITY OF PROVISIONS. If any right, preference or limitation of the
Series A Preferred Stock set forth in these resolutions and the Certificate of
Designations filed pursuant hereto (as such resolution may be amended from time
to time) is invalid, unlawful or incapable of being enforced by reason of any
rule of law or public policy, all other rights, preferences and limitations set
forth in this resolution (as so amended) which can be given effect without the
invalid, unlawful or unenforceable right, preference or limitation shall,
nevertheless, remain in full force and effect, and no right, preference or
limitation herein set forth shall be deemed dependent upon any other such right,
preference or limitation unless so expressed herein.
19. NOTICE TO THE COMPANY. All notices and other communications required or
permitted to be given to the Corporation hereunder shall be made by courier to
the Corporation at its principal executive offices located at 6840 District
Boulevard, Bakersfield, California 93313, Attention: Chairman. Minor
imperfections in any such notice shall not affect the validity thereof.
8.
<PAGE>
20. LIMITATIONS. Except as may otherwise be required by law, the shares of
Series A Preferred Stock shall not have any powers, preferences or relative,
participating, optional or other special rights other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) or otherwise in the Certificate of Incorporation of the Corporation.
IN WITNESS WHEREOF, Video City, Inc. has caused this certificate to be
executed by the undersigned on this 27th day of May, 1998.
VIDEO CITY, INC.
By /s/ Robert Y. Lee,
----------------------------
Robert Y. Lee,
Chief Executive Officer
Attest:
/s/ James Craig Kelly
- ---------------------------
James Craig Kelly,
Secretary
9.
<PAGE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is dated as of March 25, 1998, by
and between Video City, Inc., a Delaware Corporation (the "Company"), and David
A. Ballstadt ("Ballstadt").
1. Term of Employment. The Company hereby employs Ballstadt and
------------------
Ballstadt hereby agrees to serve the Company, under and subject to all of the
terms, conditions and provisions of this Agreement, for a period of two years
from the date hereof, in the capacity of Senior Vice President of the Company,
or to serve in such other executive capacity with the Company as the Company's
board of directors (the "Board") may from time to time designate, provided such
assignment is consistent with Ballstadt's level of experience and expertise. In
the performance of his duties and the exercise of his discretion, Ballstadt
shall be under the supervision and control of, and shall report only to, the
Chairman of the Board. Ballstadt's duties shall be designated by the Chairman
of the Board and shall be subject to such policies and directions as may be
established or given by the Board of Directors from time to time. Ballstadt
shall be on the Company's Board of Directors during the term of this Agreement.
2. Devotion of Time to Company Business. Ballstadt shall devote
------------------------------------
substantially all of his productive time, ability and attention to the business
of the Company during the term of this Agreement. Ballstadt shall not, without
the prior written consent of the Board of Directors, directly or indirectly
render any services of a business, commercial or professional nature to any
other person or organization, whether for compensation or otherwise, which may
compete or conflict with the Company's business or with Ballstadt's duties to
the Company.
3. Compensation.
------------
3.1 Base Salary. For all services rendered by Ballstadt under this
-----------
Agreement, the Company shall pay Ballstadt a salary ("Base Salary"), payable
semi-monthly, at the rate of $100,000 per year.
3.2 Bonus. In addition to the Base Salary, the Company shall pay
-----
Ballstadt the following bonuses ("Bonuses"), not to exceed a total of $100,000
for either of the consecutive 12-month periods (referred to herein as "Years")
beginning March 25, 1998 and March 25, 1999:
1.
<PAGE>
(a) a Bonus equal to 6% of the first $1,000,000 of Aggregate
Credits (as defined in this Section 3.2(a)) and 8% of any amounts over
$1,000,000 of Aggregate Credits received by or credited to the Company for such
Year. For purposes of this Agreement, "Aggregate Credits" in any Year consist of
(i) marketing development fund (MDF) credits in excess of $400,000 awarded by
studios and received by the Company from distributors, studios or any other
sources, plus (ii) co-op funds received by or credited to the Company other than
the current level of funds per store received by the Company pursuant to the
Company's existing arrangements with Ingram Entertainment Corporation and
Rentrak Corporation.
(b) in the second Year of this Agreement, Ballstadt may draw up
to $7,500 per quarter against his possible Bonus. Ballstadt will have no
obligation to repay any such draws to the Company if they exceed the amount of
Bonus actually earned for such Year.
(c) the Company shall pay the annual Bonus to Ballstadt within 30
days after the end of Year in which it is earned.
4. Benefits.
--------
(a) In addition to the Base Salary and the Bonus, if any, Ballstadt
will be entitled to participate in all benefits of employment available to other
members of the Company's management, including but not limited to stock option
programs, on a commensurate basis as they may be offered from time to time by
the Board of Directors to the Company's other management employees. Such
benefits include, but are not limited to, full medical, dental and long-term
disability insurance for Ballstadt and his immediate family and participation in
group life insurance and retirement plans. During the period of his employment
hereunder, Ballstadt will be reimbursed for reasonable business, travel and
entertainment expenses incurred in accordance with Company policy on behalf of
the Company in connection with his employment, and will be required to submit
appropriate expense reports for approval by signature of the Chairman of the
Board as a condition of reimbursement of such expenses.
(b) The Company will pay up to $500 per month (including all
maintenance and operating expenses) for Ballstadt to have the use of one Company
provided automobile (or an equivalent expense allowance for an automobile owned
by Ballstadt).
2.
<PAGE>
(c) The Company will pay the cost of housing for twelve months in
Southern California for Ballstadt up to $24,000.
(d) Within 30 days after written request by Ballstadt, the Company
shall reimburse Ballstadt for his reasonable and customary moving expenses
incurred at any time during the first 12 months of the term hereof.
5. Authority. So long as Ballstadt serves as an officer and Director of
---------
the Company under this Agreement, he shall have the authority specified in the
Bylaws of the Company, except that he shall not proceed with any matters, or
permit the Company to take any actions, which are prohibited by, or are in
conflict with, resolutions or guidelines adopted by the Board of Directors.
6. Termination. This Agreement may be terminated in advance of the time
-----------
specified in Section 1 above under any of the following circumstances:
(a) Upon the death of Ballstadt.
(b) In the event that Ballstadt shall become either physically or
mentally incapacitated so as to not be capable of performing his duties as
required hereunder, and if such incapacity shall continue for a period of three
months consecutively, the Company may, at its option, terminate this Agreement
by written notice to Ballstadt at that time or at any time thereafter while such
incapacity continues. In case of termination under this Section 6(b), Ballstadt
shall be entitled to receive Base Salary, Bonuses and any other compensation
accrued or earned as of or to the date of termination, and for a period of six
months following his termination.
(c) By Ballstadt, if the Company shall have materially breached any of
the provisions of this Agreement, and such termination shall have the same
effect on the payment of Ballstadt's salary as a termination by the Company
under Section 6(e).
(d) By the Company for Cause. The term "Cause" used in this Section
means Ballstadt (i) after repeated notices and warning, fails to perform his
reasonably assigned duties as reasonably determined by the Company, (ii)
materially breaches any of the terms or conditions of Sections 1 or 2 of this
Agreement, or (iii) commits or engages in a felony or any intentionally
dishonest or fraudulent act which materially damages the Company or its
reputation. If the Company terminates Ballstadt for Cause, no payments or
benefits under this Agreement shall become payable after the date of Ballstadt's
termination, provided
3.
<PAGE>
all Base Salary and Bonus (calculated on a pro rata basis of the total amount
otherwise payable for the year in which termination takes place) shall be paid
up to the date of termination. The Company may terminate Ballstadt's employment
under clause (i) or (ii) of this Section 6(d) only if written notice of the
facts constituting the basis for such termination has been given to Ballstadt
and Ballstadt has been afforded 30 days opportunity to take such action as may
be reasonable under the circumstances to furnish assurance to the Board of
Directors that such basis for termination has been corrected or cured (to the
extent susceptible to cure) and will not recur. Except as set forth above, in
the event of a termination pursuant to this Section 6(d), Ballstadt shall have
no right to receive any compensation not due and payable to him at the time of
such termination.
(e) By the Company at any time without Cause, provided that the
Company shall pay Ballstadt his Base Salary, Bonuses and all other compensation
and benefits payable hereunder through the remaining term of this Agreement.
7. Attorney Fees. The successful party in any litigation relating to
-------------
matters covered by this Agreement shall be entitled to an award of reasonable
attorneys' fees in such action.
8. Assignment. Neither this Agreement nor any of the rights or
----------
obligations of either party hereunder shall be assignable by either Ballstadt or
the Company, except that this Agreement shall be assignable by the Company to
and shall insure to the benefit of and be binding upon (i) any successor of the
Company by way of merger, consolidation or transfer of all or substantially all
of the assets of the Company to an entity other than any parent, subsidiary or
affiliate of the Company and (ii) any parent, subsidiary or affiliate of the
Company to which the Company may transfer its rights hereunder.
9. Binding Effect. The terms, conditions and agreements set forth herein
--------------
shall inure to the benefit of and be binding upon the heirs, administrators,
successors and assigns of each of the parties hereto, and upon any corporation,
entity or person with which the Company may become merged, consolidated,
combined or otherwise affiliated.
10. Amendments. This Agreement may not be altered or modified except by
----------
further written agreement between the parties.
4.
<PAGE>
11. Notices. Any notice required or permitted to be given under this
-------
Agreement by one party to the other shall be sufficient if given or confirmed in
writing and delivered personally or by facsimile transmission or mailed by first
class mail, registered or certified, return receipt requested (if mailed from
the United States), postage prepaid, addressed to such party as respectively
indicated below or as otherwise designated by such party in writing.
If to the Company, to:
Video City
6840 District Boulevard
Bakersfield, California 93313
Attn: Robert Y. Lee
Fax: (805) 397-5982
If to Ballstadt, to:
David A. Ballstadt
3904 The Strand
Manhattan Beach, California 90266
With Copy To:
Craig D. Greenberg, Esq.
Huffman, Usem, Saboe, Crawford & Greenberg, P.A.
5101 Olson Memorial Highway
Suite 1000
Minneapolis, Minnesota 55422
Fax (612) 545-2350
12. California Law. This Agreement is intended to be performed and shall
--------------
be governed by and construed in accordance with the laws of the State of
California.
13. Board of Directors. On any matter calling for authorization,
------------------
approval, decision, determination or other action of the Board of Directors
under the provisions of this Agreement, Ballstadt's vote as a director shall not
be counted.
14. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, understandings and negotiations, both written and oral,
between the parties with respect to the subject matter of this Agreement.
5.
<PAGE>
IN WITNESS HEREOF, the parties hereto have executed this Agreement as of
the date first above written.
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
-------------------------------------------
Robert Y. Lee, C.E.O./Chairman of the Board
/s/ David A. Ballstadt
----------------------
DAVID A. BALLSTADT
6.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 40,565
<SECURITIES> 0
<RECEIVABLES> 762,232
<ALLOWANCES> 0
<INVENTORY> 756,600
<CURRENT-ASSETS> 2,281,421
<PP&E> 1,715,230
<DEPRECIATION> 1,648,737
<TOTAL-ASSETS> 12,321,076
<CURRENT-LIABILITIES> 5,495,924
<BONDS> 0
0
0
<COMMON> 115,890
<OTHER-SE> 470,590
<TOTAL-LIABILITY-AND-EQUITY> 12,321,076
<SALES> 3,391,323
<TOTAL-REVENUES> 3,434,156
<CGS> 212,949
<TOTAL-COSTS> 3,297,287
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 122,144
<INCOME-PRETAX> 14,726
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<EXTRAORDINARY> 0
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<NET-INCOME> 14,726
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</TABLE>
