<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
TO
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(Title of each class)
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
---------- ----------
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant as of April 20, 1998, was approximately $7,783,081.
The number of shares of common stock outstanding on April 20, 1998 was
11,589,039 shares.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Documents incorporated by reference: None.
<PAGE>
PART III
Safe Harbor Statement under the Private Securities Litigation Reform Act of
---------------------------------------------------------------------------
1995.
- ----
This Amendment to the Annual 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,
objectives, 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, those discussed in the section
entitled "Special Considerations" as well as those discussed elsewhere in the
Annual Report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT OF THE COMPANY
The following sets forth certain information with respect to the directors
and executive officers of Video City, Inc. (the "Company"):
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITIONS WITH THE COMPANY SINCE
---- --- -------------------------- -----
<S> <C> <C> <C>
Robert Y. Lee 35 Chairman of the Board and 1997(1)
Chief Executive Officer
Barry L. Collier 55 President and Director 1997(2)
David A. Ballstadt 58 Senior Vice President and Director 1998
James Craig Kelly 40 Chief Operating Officer, Secretary 1997
and
Director
John T. Sheehy 55 Director 1997
Stephen C. Lehman 45 Director 1997
Gerald W. B. Weber 44 Director 1997
Charles E. Cooke 36 Director 1997
Michael T. Anderson 35 Director 1997
Timothy J. Denari 39 Chief Financial Officer --
</TABLE>
_______________
(1) Mr. Lee has served as a director of the Company's predecessor, Lee Video
City, Inc., since 1990. Lee Video City, Inc. merged with and into Prism
Entertainment Corporation in January 1997 and the surviving corporation
changed its name to Video City, Inc.
(2) Mr. Collier has served as a director of the Company's predecessor, Prism
Entertainment Corporation, since 1984. Lee Video City, Inc. merged with
and into Prism Entertainment Corporation in January 1997 and the surviving
corporation changed its name to Video City, Inc.
ROBERT Y. LEE has served as the Company's Chairman of the Board and Chief
Executive Officer since the merger of Lee Video City, Inc. ("Lee Video City")
with and into Prism Entertainment Corporation
2
<PAGE>
("Prism") in January 1997. Mr. Lee founded Lee Video City, Inc. and served as
its Chairman of the Board and Chief Executive Officer since its inception in
February 1990. Mr. Lee purchased his first video store in 1983, and during the
1980s opened and acquired more than 20 video stores in Southern California.
BARRY L. COLLIER has served as the President and as a director of the
Company since the merger of Lee Video City, Inc. with and into Prism
Entertainment Corporation (the "Merger") in January 1997. Mr. Collier served as
the President, Chief Operating Officer and as a director of Prism since its
inception in 1984 until the Merger. He served as the Secretary of Prism from
1984 to 1985 and was appointed as the Chief Executive Officer of Prism from 1985
until the Merger. Mr. Collier served as the Chairman of the Board of Prism from
1990 until 1994. Prism filed a voluntary petition under Chapter 11 of the
Bankruptcy Code in December 1995 and emerged from Chapter 11 upon the
consummation of the Merger.
DAVID A. BALLSTADT has served as the Senior Vice President and as a
director of the Company since the acquisition by the Company of its
subsidiaries, Adventures in Video, Inc. and KDDJ Investments, Inc., in March
1998. Mr. Ballstadt founded and served as the President and Chief Executive
Officer of Adventures in Video, Inc. and KDDJ Investments, Inc. until their sale
to the Company.
JAMES CRAIG KELLY has served as the Chief Operating Officer and Senior Vice
President and as a director of the Company since the Merger in January 1997, and
as its Secretary from January 1997 to April 16, 1997 and from November 20, 1997
to date. Mr. Kelly served as the Chief Operating Officer of Lee Video City,
Inc. from 1992 until the Merger. For fifteen years, Mr. Kelly held various
positions with Wherehouse Entertainment, a $500 million revenue retailer of
music and video products, including Director of Loss Prevention from 1982 to
1984, and Vice President and Regional Manager for Wherehouse from 1984 to 1991.
JOHN T. SHEEHY has served as a director of the Company since November 1997.
Mr. Sheehy has been the Managing Director of The Value Group, LLC, an investment
banking firm, since April 1996. Mr. Sheehy currently serves as a director of
The First Australia Fund, Inc., The First Australia Prime Income Fund, Inc., The
First Commonwealth Fund, Inc. and The First Australia Prime Income Investment
Company Limited, all of which are publicly-held companies.
STEPHEN C. LEHMAN has served as a director of the Company since the Merger
in January 1997. Mr. Lehman served as the President, Chief Executive Officer
and Chairman of the Board of Premiere Radio Networks, Inc., a producer of radio
programming, since its inception in January 1987. Prior to this, he was the
President of Stephen Lehman Productions, a syndicated radio program company
while also serving as on-air personality at KIIS AM and FM/Los Angeles. From
1982 to 1984, Mr. Lehman specialized in building radio networks for independent
radio syndication.
GERALD W. B. WEBER has served as a director of the Company since the Merger
in January 1997. Mr. Weber was the Senior Vice President of Retail Operations
of AutoNation USA, where he was responsible for all AutoNation USA retail
operations, including sales, training, planning, hiring and loss prevention.
Prior to joining AutoNation USA, Mr. Weber held various management positions
with Blockbuster Entertainment, including Zone Vice President of the East and
Southeast Regions, Vice President of Operations, and Senior Vice President of
Domestic Retail for the video retail division and President of Blockbuster
Music.
CHARLES E. COOKE has served as a director of the Company since the Merger
in January 1997. Mr. Cooke is a principal of Cooke & Grace Properties which
owns, manages, sells and leases commercial real property. From 1985 to 1994,
Mr. Cooke was affiliated with Dobson & Johnson, Inc. as a commercial real estate
broker. Mr. Cooke currently serves as a director of Nashville Bank of Commerce,
a publicly-held company.
3
<PAGE>
MICHAEL T. ANDERSON has served as a director of the Company since the
Merger in January 1997. Mr. Anderson is a principal in the law firm of Troop
Meisinger Steuber & Pasich, LLP, in Los Angeles, California, where he
specializes in commercial litigation. Prior to joining this firm, Mr. Anderson
was associated with the law firm of DeCastro, West, Chodorow & Burns, and was
also an associate at the Boston Consulting Group, a management consulting firm.
TIMOTHY J. DENARI has served as the Chief Financial Officer of the Company
since October 1997. Prior to joining the Company, he was the corporate
controller for Fleet Card Fuels, a $100 million fuel sales corporation. Between
1993 and 1995, he was the Chief Financial Officer and Controller of the
Company's predecessor, Lee Video City. Between 1990 and 1993, Mr. Denari was an
Account Executive for Merrill Lynch and Shearson Lehman, managing over $30
million in private client assets. Between 1985 and 1990, he was Vice President
of the Bank of Stockdale. In November 1997, Mr. Denari filed a voluntary
petition under Chapter 7 of the Bankruptcy Code as a result of his personal
guarantee of certain indebtedness and contingent liabilities of a corporation
that operated two video stores.
The Company, Robert Y. Lee, Barry L. Collier and Ingram Entertainment, Inc.
("Ingram") have entered into a Stockholders Agreement, dated as of January 8,
1997, which provides that the Company's Board of Directors shall consist of
eight members and that Ingram, Mr. Lee and Mr. Collier shall collectively vote
their shares in favor of two designees of Ingram, four designees of Mr. Lee and
two designees of Mr. Collier. Of the present Board of Directors, Charles E.
Cooke and Michael T. Anderson are the designees of Ingram; Mr. Lee, James Craig
Kelly, John T. Sheehy and Stephen C. Lehman are the designees of Mr.Lee; and
Barry L. Collier and Gerald W. B. Weber are the designees of Mr. Collier.
Effective March 25, 1998, the Board was increased to nine members and David A.
Ballstadt was elected to fill that vacancy. The same parties also entered into
an Override Agreement, dated November 19, 1996, which provides, subject to
certain exceptions, that without the written consent of Ingram, the Company
shall not enter into a merger or a sale or transfer of all or substantially all
of its assets, or make any material change in the nature of its business as now
conducted, or change the form of organization of its business; and that without
unanimous approval of the Board of Directors, the Company shall not enter into
any line of business other than the sale and rental of video product and related
goods, the completion of one film that the Company's predecessor, Prism
Entertainment Corporation, had under way, and the exploitation of Prism's film
library; these provisions will remain in force until the later of the payment in
full of the Company's $1,500,000 debt to Ingram (which was paid in full on March
25, 1998), or such time as Ingram's beneficial ownership interest in the
Company's common stock, on a fully diluted basis, is 4 percent or less.
The Agreements of Merger and Plan of Reorganization entered into by the
Company in connection with the acquisition by the Company of Adventures in
Video, Inc. and KDDJ Investments, Inc. from David A. Ballstadt and members of
his immediate family, provide that Mr. Ballstadt shall be elected as a director
of the Company, effective upon the closing of such acquisitions. Concurrent
with the completion of the acquisitions on March 25, 1998, the Board of
Directors of the Company was expanded from eight to nine members and Mr.
Ballstadt was elected to fill this vacancy. Mr. Ballstadt has served as a
director of the Company since the consummation of the acquisitions.
Directors serve until the next annual meeting of the Company's stockholders
or until their successors are elected or appointed. Officers are elected by and
serve at the discretion of the Board of Directors. There are no family
relationships among the officers or directors of the Company.
MEETINGS; ATTENDANCE; COMMITTEES
During the fiscal year ended January 31, 1998, the Board of Directors of
the Company met twice and the audit committee met once. No incumbent member who
was a director during the past fiscal year attended fewer than 75% of the
aggregate of all meetings of the Board of Directors and all meetings of the
committees of the Board of Directors on which he served.
4
<PAGE>
The Company's compensation committee was formed to make recommendations to
the Board concerning salaries and incentive compensation for officers and
employees of the Company, including the grant of stock options to the Company's
executive officers under the Company's stock option plans. The compensation
committee currently consists of Stephen C. Lehman and Charles E. Cooke. The
audit committee reviews the scope of the audit and other accounting related
matters. The Company's audit committee currently consists of Gerald W. B. Weber
and Michael T. Anderson. The Company has no other committees of its Board of
Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than 10 percent of a registered class of the Company's equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "Commission"). Directors, executive officers and
greater than 10 percent stockholders are required by the Commission's
regulations to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on a review of the copies of the forms furnished to the
Company and the representations made by the reporting persons to the Company,
the Company believes that during the fiscal year ended January 31, 1998, its
directors, executive officers and 10 percent stockholders complied with all
filing requirements under Section 16(a) of the Exchange Act, with the exception
of the following: Timothy J. Denari filed a late Form 3 upon being appointed as
an executive officer of the Company; and John T. Sheehy filed a late Form 3 upon
being appointed as a director of the Company.
5
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the fiscal years ended
January 31, 1998, December 31, 1996 and December 31, 1995 paid by the Company to
its Chief Executive Officer and the other executive officers of the Company who
earned in excess of $100,000 (collectively, the "Named Executive Officers")
based on salary and bonus for the fiscal year ended January 31, 1998:
<TABLE>
<CAPTION>
NAME AND LONG-TERM
PRINCIPAL POSITION ANNUAL COMPENSATION(1) COMPENSATION
- --------------------------- ---------------------------------------- ------------
Securities
Period Underlying
Ended(2) Salary($) Bonus Options (#)
-------------------- --------- ----- -----------
<S> <C> <C> <C> <C>
Robert Y. Lee (3) January 31, 1998 $178,000 $ --
Chief Executive Officer December 31, 1996 172,701 -- --
December 31, 1995 203,958 -- --
--
Barry L. Collier(4) January 31, 1998 178,000 -- --
President December 31, 1996 291,168 -- 175,000
December 31, 1995 436,645 -- --
James Craig Kelly(5) January 31, 1998 120,000 -- --
Chief Operating Officer December 31, 1996 101,282 -- 761,600
December 31, 1995 100,000 -- --
</TABLE>
___________
(1) The compensation described in this table does not include medical
insurance, retirement benefits and other benefits received by the foregoing
executive officers which are available generally to all employees of the
Company and certain perquisites and other personal benefits received by the
foregoing executive officers of the Company, the value of which did not
exceed the lesser of $50,000 or 10% of the executive officer's cash
compensation in the table.
(2) Upon the consummation of the merger of Lee Video City, Inc. with and into
Prism Entertainment Corporation on January 8, 1997, the Company changed its
fiscal year end from December 31 to January 31.
(3) Mr. Lee served as the Chief Executive Officer of the Company's predecessor,
Lee Video City, before the Merger. Mr. Lee's compensation during the fiscal
years ended December 31, 1996 and December 31, 1995 reflect compensation
paid to Mr. Lee by Lee Video City.
(4) Mr. Collier served as the Chief Executive Officer of the Company's
predecessor, Prism, before the Merger. Mr. Collier's compensation during
the fiscal years ended December 31, 1996 and December 31, 1995 reflect
compensation paid to Mr. Collier by Prism.
(5) Mr. Kelly served as the Chief Operating Officer of the Company's
predecessor, Lee Video City, before the Merger. Mr. Kelly's compensation
during the fiscal years ended December 31, 1996 and December 31, 1995
reflect compensation paid to Mr. Kelly by Lee Video City.
OPTION GRANTS
The Company did not grant any stock options to the Named Executive Officers
during the fiscal year
6
<PAGE>
ended January 31, 1998.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
No stock options were exercised by any of the Named Executive Officers
during the fiscal year ended January 31, 1998. The following table sets forth
certain information regarding stock options held by the Named Executive Officers
as of January 31, 1998:
FISCAL YEAR-END OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
NAME YEAR-END (#) FISCAL YEAR END ($)(1)
- -------------------- --------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert Y. Lee....... 0 0 0 0
Barry L. Collier.... 175,000 0 $113,750 0
James Craig Kelly... 761,600 0 $182,784 0
</TABLE>
___________________
(1) Amounts are shown as the positive spread between the exercise price and an
estimated fair market price of $0.75 per share as of January 31, 1998. The
Company's Common Stock was not traded on an established public trading
market during the fiscal year ended January 31, 1998.
DIRECTOR COMPENSATION
Directors, other than directors who are employees of the Company, receive
cash compensation in the amount of $5,000 per year for serving on the Board of
Directors and are also entitled to participate in the Company's stock option
plans and from time to time to receive grants of options thereunder to purchase
shares of the Company's Common Stock. During the fiscal year ended January 31,
1998, Stephen C. Lehman, Gerald W. B. Weber, Charles E. Cooke and Michael T.
Anderson each received options to purchase 5,000 shares of the Company's Common
Stock at $2.00 per share pursuant to the Company's 1996 Stock Option Plan. In
February 1998, Messrs. Lehman, Weber, Cooke, Anderson and Sheehy each received
options to purchase 5,000 shares of the Company's Common Stock at $2.00 per
share. Messrs. Lehman and Weber received additional compensation as consultants
pursuant to consulting agreements entered into with the Company. See "Certain
Relationships and Related Transactions."
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement (the "Lee Employment
Agreement") with Robert Y. Lee pursuant to which Mr. Lee serves as the Chairman
of the Board and Chief Executive Officer of the Company for a term of three
years commencing January 1997. The Lee Employment Agreement provides for a base
salary of $178,000 per year and an annual bonus of 3 percent of any pre-tax
profit in excess of $1,100,000 with respect to the fiscal year commencing
February 1997; 3 percent of any pre-tax profit in excess of $1,200,000 with
respect to the fiscal year commencing February 1998; and 3 percent of any pre-
tax profit in excess of $1,300,000 with respect to the fiscal year commencing
February 1999. The Lee Employment Agreement also provides that Mr. Lee shall be
entitled to certain fringe benefits including payments of up to $500 per month
for the use of an automobile.
The Company entered into an employment agreement (the "Collier Employment
Agreement") with Barry L. Collier pursuant to which Mr. Collier serves as the
President of the Company for a term of two years commencing January 1997. The
Collier Employment Agreement provides for a base salary of $178,000 per year.
In addition, the Collier Employment Agreement provides that Mr. Collier shall be
entitled to an annual bonus equal to 12 percent of all annual revenues (net of
commissions and expenses related thereto)
7
<PAGE>
recorded in excess of $625,000 from the licensing and/or transfer of rights to
the Prism film library; an annual bonus equal to 5 percent of any promotional
advertising development funds from any external source in excess of $350,000
received by or credited to the Company; and a bonus equal to 20 percent of
proceeds in excess of $3,700,000 (net of commissions and expenses of sale)
received by the Company generated from the sale of the Company's film library in
its entirety. The Collier Employment Agreement also provides that Mr. Collier
shall be entitled to certain fringe benefits including payments of up to $500
per month for the use of an automobile.
The Company entered into an employment agreement (the "Kelly Employment
Agreement") with James Craig Kelly pursuant to which Mr. Kelly serves as the
Senior Vice President and Chief Operating Officer of the Company for a term of
three years commencing January 1997. The Kelly Employment Agreement provides
for a base salary of $120,000 per year and an annual bonus of 3 percent of any
pre-tax profit in excess of $1,100,000 with respect to the fiscal year
commencing February 1997; 3 percent of any pre-tax profit in excess of
$1,200,000 with respect to the fiscal year commencing February 1998; and 3
percent of any pre-tax profit in excess of $1,300,000 with respect to the fiscal
year commencing February 1999. The Kelly Employment Agreement also provides
that Mr. Kelly shall be entitled to certain fringe benefits including payments
of up to $500 per month for the use of an automobile.
In the event that the employment of Messrs. Lee, Collier or Kelly is
terminated for any reason other than "material breach" or "cause" as defined in
his employment agreement, the Company shall pay the remainder of the base salary
to such individual for the remaining term of such employment agreement.
STOCK OPTION PLAN
In November 1996, the Board of Directors and shareholders of the Company's
predecessor, Lee Video City, Inc., adopted its 1996 Stock Option Plan (the "1996
Plan"). The 1996 Plan, which was assumed by the Company, provides for the grant
of options to directors, officers, other employees and consultants of the
Company to purchase up to an aggregate of 1,000,000 shares of Common Stock. The
purpose of the 1996 Plan is to provide participants with incentives which will
encourage them to acquire a proprietary interest in, and continue to provide
services to, the Company. The 1996 Plan is to be administered by the Board of
Directors, or a committee of the Board, which has discretion to select optionees
and to establish the terms and conditions of each option, subject to the
provisions of the 1996 Plan. Options granted under the 1996 Plan may be
"incentive stock options" as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), or nonqualified options.
The exercise price of incentive stock options may not be less than the fair
market value of Common Stock as of the date of grant (110% of the fair market
value if the grant is to an employee who owns more than 10 percent of the total
combined voting power of all classes of capital stock of the Company). The Code
currently limits to $100,000 the aggregate value of Common Stock that may be
acquired in any one year pursuant to incentive stock options under the 1996 Plan
or any other option plan adopted by the Company. Nonqualified options may be
granted under the 1996 Plan at an exercise price of not less than 85% of the
fair market value of the Common Stock on the date of grant. Nonqualified
options may be granted without regard to any restriction on the amount of Common
Stock that may be acquired pursuant to such options in any one year. Options
may not be exercised more than ten years after the date of grant (five years
after the date of grant if the grant is an incentive stock option to an employee
who owns more than 10 percent of the total combined voting power of all classes
of capital stock of the Company), or such lesser period of time as is set forth
in the applicable stock option agreement. Options granted under the 1996 Plan
generally are nontransferable except by will or by the laws of descent and
distribution. Shares subject to options that expire unexercised under the 1996
Plan will once again become available for future grant under the 1996 Plan. The
number of options outstanding and the exercise price thereof are subject to
adjustment in the case of certain transactions such as recapitalizations,
8
<PAGE>
stock splits or stock dividends. The 1996 Plan is effective for ten years,
unless sooner terminated or suspended.
In general, upon termination of employment of an optionee, all options
granted to such person which were not exercisable on the date of such
termination will immediately terminate, and any options that are exercisable
will terminate not less than three months (six months in the case of termination
by reason of death or disability) following termination of employment, or such
other period of not less than 30 days after the date of termination as is
specified in the applicable stock option agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's compensation committee was formed to make recommendations to
the Board concerning salaries and incentive compensation for officers and
employees of the Company, including the grant of stock options to the Company's
executive officers under the Company's stock option plans. The compensation
committee consisted of Stephen C. Lehman and Charles E. Cooke during the fiscal
year ended January 31, 1998. Mr. Lehman provided finance, acquisitions and
corporate development consulting services to the Company pursuant to a
consulting agreement entered into between the Company and Mr. Lehman. The
consulting agreement, as amended, provides for compensation in the form of
options to purchase 90,000 shares of the Company's Common Stock at $2.00 per
share and warrants to purchase 100,000 shares of the Company's Common Stock at
$2.00 per share. See "Certain Relationships and Related Transactions."
9
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 26, 1998, by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock, (ii) each of the directors of the Company, (iii) each
of the Named Executive Officers, and (iv) all officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address(1) Beneficially Owned(2) Outstanding
- -------------------------------------------- ------------------------- --------------
<S> <C> <C>
Robert Y. Lee............................... 3,319,024(3) 28.6%
Barry L. Collier............................ 960,434(4) 8.2%
David A. Ballstadt.......................... 335,500 2.9%
James Craig Kelly........................... 761,600(4) 6.2%
John T. Sheehy.............................. 20,000(4) *
Stephen C. Lehman........................... 170,000(4)(5) 1.4%
Gerald W. B. Weber.......................... 60,000(4) *
Charles E. Cooke............................ 15,000(4) *
Michael T. Anderson......................... 10,000(4) *
Ingram Entertainment Inc.(6)................ 2,757,153(6) 22.2%
Mortco, Inc.(7)............................. 1,329,666(7) 11.3%
All Directors and Executive Officers as a 5,086,124(4)(5) 39.8%
group (10 persons).........................
</TABLE>
_____________
* Less than one percent.
(1) Except as otherwise indicated, the address of each principal stockholder of
the Company is c/o Video City, Inc. at 6840 District Boulevard,
Bakersfield, California 93313.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the securities. Shares of Common Stock
subject to options or warrants that are currently exercisable or are
exercisable within 60 days of May 26, 1998, are deemed outstanding for
computing the percentage of the person holding such options or warrants but
are not deemed outstanding for computing the percentage of any other
person. Except as indicated by footnote and subject to community property
laws where applicable, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(3) Includes a proxy to vote 610,000 shares owned by Mr. Collier.
(4) Includes the following currently exercisable stock options to purchase
shares from the Company: Mr. Collier, 175,000 shares; Mr. Kelly, 761,600
shares; Mr. Sheehy, 5,000 shares; Mr. Lehman, 70,000 shares; Mr. Weber,
60,000 shares; Mr. Cooke, 10,000 shares; and Mr. Anderson, 10,000 shares.
(5) Includes a warrant to purchase 100,000 shares of Common Stock from the
Company.
10
<PAGE>
(6) Consists of 1,500,000 shares owned outright; a warrant to purchase 404,403
shares from Robert Y. Lee; and a warrant to purchase 852,750 shares from
the Company. Ingram Entertainment Inc.'s address is Two Ingram Boulevard,
La Vergne, Tennessee 37089.
(7) Consists of 1,133,106 shares owned outright; and warrants to purchase
196,560 shares from the Company. Mortco, Inc.'s address is One Airport
Center, 7700 N.E. Ambassador Place, Portland, Oregon 97220. Mortco, Inc. is
a wholly-owned subsidiary of Rentrak Corporation.
The Company does not know of any arrangements that may at a subsequent date
result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Ingram Entertainment Inc. has been the principal supplier of videocassettes
and related equipment to the Company for a number of years, and has been a
secured creditor of the Company since August 1991. As of December 31, 1995, the
Company owed Ingram $7.3 million. This amount was paid down to $4.5 million in
June 1996 with proceeds derived from the Company's sale of eleven stores. On
January 8, 1997, concurrent with the merger of Lee Video City, Inc. into Prism
Entertainment Corporation, Ingram accepted 1,500,000 shares of common stock of
the Company in cancellation of $3,000,000 of the Company's indebtedness to
Ingram, reducing the Company's remaining long-term indebtedness to Ingram to
$1,500,000. At the same time, Ingram also received warrants to purchase 852,750
shares of common stock from the Company and 404,403 shares of common stock from
Robert Y. Lee. In March 1998, the Company used funds in the amount of
$1,500,000 from the credit facility with FINOVA Capital Corporation to pay off
the term loan owing to Ingram.
In addition, the Company entered into a new long-term supply agreement with
Ingram for videocassettes and related products; Ingram released Mr. Lee from his
personal guarantee of the Company's indebtedness; and the parties entered into
the Stockholders Agreement and the Override Agreement referred to in Item 10 of
this Form 10-K Report, which among other things prohibit certain corporate
actions without the approval of Ingram or Ingram's designees on the Board of
Directors. All of these transactions and arrangements were entered into either
simultaneously with or prior to Ingram's receipt of stock of the Company.
On March 25, 1998, the Company acquired Adventures in Video, Inc.
("Adventures in Video") and KDDJ Investments, Inc. ("KDDJ") from David A.
Ballstadt and members of his immediate family pursuant to two Agreements of
Merger and Plan of Reorganization (each a "Merger Agreement"). Adventures in
Video owns and operates 13 stores in the greater Minneapolis metropolitan area
and KDDJ owns and operates three stores in San Francisco, California. The
purchase price for Adventures in Video was 440,000 shares of the Company's
Common Stock, plus an additional 426,000 shares that will become issuable if
either (a) the gross revenues of such stores during the three months of April
through June 1998 exceed their gross revenues during the corresponding three
months of 1997, or (b) if the Company fails to make certain specified upgrades
of the stores. The purchase price for KDDJ was 110,000 shares of the Company's
Common Stock plus an additional 106,500 shares that will become issuable if
those three stores meet targets substantially the same as the contingent share
targets described above for Adventures in Video. The two Merger Agreements
provide for an adjustment in the number of the Company's shares if and to the
extent that the aggregate liabilities of the two companies as of the closing is
greater or less than $1,200,000. Pursuant to the Adventures in Video Merger
Agreement, the Company paid off existing indebtedness of approximately $449,000
that Adventures in Video owed to Marquette Bank, N.A. Concurrently with these
two acquisitions, the Board of Directors of the Company was expanded from eight
to nine members and David A. Ballstadt was elected to fill this vacancy. Mr.
Ballstadt has served as a director of the Company since the consummation of the
two acquisitions. The Company also entered into a two-year employment agreement
with Mr. Ballstadt at a salary
11
<PAGE>
of $100,000 per year plus a possible bonus of up to $100,000 per year based on
increases, if any, in certain dealer allowances, and certain additional
benefits.
On March 25, 1998, the Company sold the rights to its library of 47 feature
films and other properties and related accounts receivable 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. The film library is stated at the net
realizable value at January 31, 1998. The library was the principal asset of
Prism, prior to the merger in January 1997 of Lee Video City with and into
Prism. Under the agreement by which the Company sold its film rights, the
Company has a right to buy back the film library at any time through February 4,
1999 at escalating prices ranging from $1,650,000 to $1,850,000, less amounts
actually received and collected by the buyer on account of the accounts
receivable or other exploitation of the film library; the Company would not
exercise this right unless it expects to be able to resell the film library at a
profit, since management no longer intends to remain in the film production or
distribution business.
On March 25, 1998, the Company also entered into a restructured debt
agreement with Rentrak Corporation ("Rentrak"), a major lessor of videocassettes
under a revenue sharing arrangement. Prior to the acquisition of the five
companies on March 25, 1998, the Company and Sulpizio One, Inc. (one of the
acquired companies) were parties to such arrangements with Rentrak. With the
expanded group of stores as a result of the acquisitions, management expects to
increase its leasing of videocassettes from Rentrak. As part of the
restructuring, Rentrak agreed to accept 194,950 shares of the Company's Common
Stock in settlement of a lawsuit Rentrak had previously filed against Adventures
in Video, Inc. (one of the acquired companies), and 470,162 shares of the
Company's Common Stock in satisfaction of indebtedness owed to Rentrak by
Sulpizio One, Inc. As part of the restructured debt agreement, Rentrak also
agreed to a deferral of certain amounts owed to it by Sulpizio One, Inc. and the
Company, and obtained a security interest in the assets of the Company to secure
such amounts. Rentrak also released Robert Y. Lee, the Company's Chairman of
the Board and Chief Executive Officer, from personal guaranties of the Company's
indebtedness that Mr. Lee had previously given. Rentrak's wholly-owned
subsidiary, Mortco, Inc., is a principal shareholder of the Company.
On April 16, 1997, the Company entered into three year consulting
agreements with Gerald W. B. Weber and Stephen C. Lehman pursuant to which
Messrs. Weber and Lehman shall provide finance, acquisitions and corporate
development consulting services to the Company. The consulting agreements of
Messrs. Weber and Lehman provide for compensation in the form of options to
purchase an aggregate of 75,000 and 90,000 shares, respectively, of the
Company's Common Stock at $2.00 per share. Options to purchase one-third of
such shares of Common Stock vest each year commencing on April, 16, 1997 and any
unexercised portions terminate on April 15, 2002. Each consulting agreement
also provides that the Company shall reimburse the consultant for reasonable
out-of-pocket expenses incurred in performing his consulting services, that the
Company shall indemnify the consultant with respect to any claims made against
the consultant arising in connection with the consulting service, and that
either party may terminate the consulting agreement by providing 30 days notice
to the other party. On March 24, 1998, Mr. Lehman's consulting agreement was
amended to provide Mr. Lehman additional compensation in the form of warrants to
purchase 100,000 shares of the Company's Common Stock at $2.00 per share.
Messrs. Weber and Lehman are directors of the Company.
In April 1997, the Company entered into an engagement agreement with Sphere
Capital Partners ("Sphere Capital") pursuant to which Sphere Capital shall act
as the exclusive financial advisor to the Company providing financial
management, acquisition and financing advisory services for a period of one year
commencing April 1997 and for such additional one year terms as may be mutually
agreed to by Sphere Capital and the Company. The agreement provides that during
the term of the engagement, Sphere Capital shall limit its financial advisory
services within the video retail industry solely to the Company. The engagement
agreement provides for a base fee of $5,000 per month which shall be credited
against any
12
<PAGE>
transaction fees to which Sphere Capital may be entitled upon consummation of
any acquisition or financing transaction. The engagement agreement also
provides that the Company shall reimburse Sphere Capital for reasonable out-of-
pocket expenses incurred in performing its financial advisory services and that
either party may terminate the engagement by providing 45 days notice to the
other party. During the fiscal year ended January 31, 1998, the Company paid
Sphere Capital fees in the amount of approximately $28,000. Effective April
1998, a new engagement agreement was entered into by the Company and The Value
Group, LLC, the successor entity to Sphere Capital, which provides for a base
fee of $2,500 per month which shall be credited against any transaction fees to
which The Value Group, LLC, may be entitled upon consummation of any acquisition
or financing transaction. John T. Sheehy serves as a director of the Company
and is a Managing Director of The Value Group, LLC and its predecessor, Sphere
Capital.
In May 1998, the Company commenced a private placement financing of the
Company's securities in which Ridgewood Capital Funding, Inc. ("Ridgewood") has
agreed to serve as the placement agent. John T. Sheehy, a member of the Board
of Directors of the Company, will assist Ridgewood in conducting the offering,
acting as a registered broker under Ridgewood's broker-dealership. In addition,
certain directors of the Company and The Value Group, LLC may participate in the
private placement financing by investing in the Company's securities.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to the
Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
VIDEO CITY, INC.
By /s/ Robert Y. Lee
--------------------------
Robert Y. Lee
Chairman of the Board
and Chief Executive Officer
Date: May 29, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 to the Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert Y. Lee Chairman of the Board and May 29, 1998
- ------------------------- Chief Executive Officer
Robert Y. Lee (Principal
Executive Officer)
/s/ Barry L. Collier President and Director May 29, 1998
- -------------------------
Barry L. Collier
/s/ David A. Ballstadt Senior Vice President and Director May 29, 1998
- -------------------------
David A. Ballstadt
/s/ Timothy J. Denari Chief Financial Officer May 29, 1998
- ------------------------- (Principal
Timothy J. Denari Financial and Accounting Officer)
/s/ James Craig Kelly Secretary and Director May 29, 1998
- -------------------------
James Craig Kelly
/s/ John T. Sheehy Director May 29, 1998
- -------------------------
John T. Sheehy
Director May ___, 1998
- -------------------------
Michael T. Anderson
Director May ___, 1998
- -------------------------
Gerald W.B. Weber
Director May ___, 1998
- -------------------------
Charles E. Cooke
Director May ___, 1998
- -------------------------
Stephen C. Lehman
</TABLE>
